The prevailing exchange rates at the time of the investment are expected to be as follows:
		GBP 1.00 = USD 1.30		Euro 1.00 = USD 1.17
The rate of interest on short-term government securities at the time of the investment are
expected to be as follows:
		U.K.: 2%		Euro zone: 1%
Required: Based SOLELY on the facts given above, prepare a presentation in which you
evaluate the proposed project from the point of view of the Irish firm, Effin, Ltd.

A B D E F G 1 Effin Ltd. Is an Irish company that has retail shops in various locations in the Republic of 2 Ireland. It sells both is own-name brands and other brands in these outlets. It also sells its 3 own-name brand products to shops in in Northern Ireland (U.K.), where it has no retail out- 4 lets, through a Northern Ireland wholesaler. All sales to this wholesaler are made in euro. 5 6 Annually, Effin sells about 1.0 million units of its product to the Northern Ireland wholesaler 7 at an average price of Euro 10 per unit. The firm's unit variable cost is Euro 4. However, 8 the units sold to the Northern Ireland wholesaler have an average variable cost of Euro 5. 9 The additional Euro 1 reflects transport, freight insurance and incidental costs. 10 11 Beginning in 2022, as a result of Brexit, the unit variable cost for the goods shipped to 12 Northern Ireland will rise to Euro 7, due to import duties and a heavier regulatory burden. 13 Effin is threfore considering a ten-year project involving the acqusition of a plant in Armagh, 14 Northern Ireland, in which it would make its product locally. It would rebrand the product 15 slightly, emphasising its local character. This would make it attractive to more Northern 16 Ireland retailers (to whom Effin would now sell directly) thus increaasing sales. 77 18 The acquisition of the Armagh plant would require a capital investment of GBP 10 million. 19 It would also require an investment in working capital of 10% of annual sales. Effin antici- 20 pates that sales from the plant would amount to at least 1.2 million units p.a., at a price of 21 GBP 10 and average variable cost of GBP 4. Fixed costs are estimated at GBP 1.5 million 22 p.a. The plant has an estimated residual value of GBP 1 million. Effin's cost of funds is 16%. 23 24 The proposed Northern Ireland operation would be set up as a U.K. subsidiary, incorporated 25 in Northern Ireland, and subject to U.K. taxes. For U.K. tax purposes, the plant would be 26 depreciated straight-line to zero over ten years. The U.K. tax rate will be 25%. Effin's tax 27 rate in the Republic of Ireland will be 15%. None of the profits or dividends of Effin's 28 Northern ireland subsidiary would not be taxed again in the Republic of Ireland under the 29 terms of the double taxation treaty between Ireland and the U.K. 30 31 The effect of the project on Effin's operations in the Republic of Ireland would, obviously, be 32 to reduce sales and variable costs related to the 1 million units it currently sells to the Nor- 33 thern Ireland wholesaler. In addition, for the duration of the project, it would free up wor- 34 king capital in the Republic of Ireland operation amounting to 10% of those annual sales. A B D E F G 1 Effin Ltd. Is an Irish company that has retail shops in various locations in the Republic of 2 Ireland. It sells both is own-name brands and other brands in these outlets. It also sells its 3 own-name brand products to shops in in Northern Ireland (U.K.), where it has no retail out- 4 lets, through a Northern Ireland wholesaler. All sales to this wholesaler are made in euro. 5 6 Annually, Effin sells about 1.0 million units of its product to the Northern Ireland wholesaler 7 at an average price of Euro 10 per unit. The firm's unit variable cost is Euro 4. However, 8 the units sold to the Northern Ireland wholesaler have an average variable cost of Euro 5. 9 The additional Euro 1 reflects transport, freight insurance and incidental costs. 10 11 Beginning in 2022, as a result of Brexit, the unit variable cost for the goods shipped to 12 Northern Ireland will rise to Euro 7, due to import duties and a heavier regulatory burden. 13 Effin is threfore considering a ten-year project involving the acqusition of a plant in Armagh, 14 Northern Ireland, in which it would make its product locally. It would rebrand the product 15 slightly, emphasising its local character. This would make it attractive to more Northern 16 Ireland retailers (to whom Effin would now sell directly) thus increaasing sales. 77 18 The acquisition of the Armagh plant would require a capital investment of GBP 10 million. 19 It would also require an investment in working capital of 10% of annual sales. Effin antici- 20 pates that sales from the plant would amount to at least 1.2 million units p.a., at a price of 21 GBP 10 and average variable cost of GBP 4. Fixed costs are estimated at GBP 1.5 million 22 p.a. The plant has an estimated residual value of GBP 1 million. Effin's cost of funds is 16%. 23 24 The proposed Northern Ireland operation would be set up as a U.K. subsidiary, incorporated 25 in Northern Ireland, and subject to U.K. taxes. For U.K. tax purposes, the plant would be 26 depreciated straight-line to zero over ten years. The U.K. tax rate will be 25%. Effin's tax 27 rate in the Republic of Ireland will be 15%. None of the profits or dividends of Effin's 28 Northern ireland subsidiary would not be taxed again in the Republic of Ireland under the 29 terms of the double taxation treaty between Ireland and the U.K. 30 31 The effect of the project on Effin's operations in the Republic of Ireland would, obviously, be 32 to reduce sales and variable costs related to the 1 million units it currently sells to the Nor- 33 thern Ireland wholesaler. In addition, for the duration of the project, it would free up wor- 34 king capital in the Republic of Ireland operation amounting to 10% of those annual sales