Leo plc is considering entering a new market. A new product has been developed at a cost
Question:
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.
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