Leo plc is considering entering a new market. A new product has been developed at a cost of £5 million and is now ready for production. The market is growing and estimates from the finance department concerning future sales of the new product are as follows:

After Year 5, sales are expected to stabilise at the Year 5 level.

You are informed that:

• the operating profit margin from sales in the new market is likely to be a constant 20
  per cent of sales revenue
• the cash tax rate is 25 per cent of operating profit 
• replacement non-current asset investment (RNCAI) will be in line with the annual depreciation charge each year 
• additional non-current asset investment (ANCAI) over the next five years will be 15 per cent of sales growth 
• additional working capital investment (AWCI) over the next five years will be 10 per cent of sales growth.

Required:

Using an SVA approach, indicate the effect of entering the new market on shareholder value.

Transcribed Image Text:

Year 12345 Sales £m 30.0 36.0 40.0 48.0 60.0