Blue plc is a relatively small company with only one SBU. It manufactures wire grilles for the consumer market for cooker manufacturers and for export. Following a thorough investigation by the finance department and the heads of the customer lines some facts emerged about the returns expected in each of the customer sectors. The consumer sector uses £1m of the firm’s capital and is expected to produce a return of 18 per cent on this capital, for the next five years, after which it will return the same as its risk-adjusted cost of capital (WACC), 15 per cent.

The cooker sales sector uses £2m of capital and will return 14 per cent per annum for seven years when its planning horizon ends. Its WACC is 16 per cent.

The export sector has a positive performance spread of 2 per cent over WACC for the next six years. The required rate of return is 17 per cent. From Year 7 the performance spread becomes zero. This division uses £1.5m of capital.

Required a Calculate the annual (entity version) economic profit of each sector.

b What is the total value creation from each if you assume profit numbers equate to cash flow numbers?

c Display a value-creation profile chart and suggest possible action.