GoGo Ltd. is based in Bangor and manufactures luxury perfume. Over the past three years, GoGo has witnessed a decline in sales. In an attempt to save the company, GoGo’s Managing Director has announced a potential joint venture agreement with a company based in China. A Chinese company, Mei Gui Luxury perfume Ltd., has expressed an interest in using GoGo’s technical expertise and patented technology, to produce luxury perfume.

If the agreement is executed GoGo will provide 60% of the total capital of 60 million Chinese Yuans to set-up a local production facility. 30 million Yuans, included within the total capital, will be for working capital and the remainder for depreciable fixed assets.

The agreement will be for a period of 4 years. Thereafter, Mei Gui Luxury perfume will buy GoGo’s share of the venture for a sum of 10 million Yuans.

The joint venture agreement would give GoGo an 75% share in the profits and losses.

The luxury perfume is expected to sell in China for a price of 450 Yuans per unit in year 1. Prices will then increase by the expected rate of inflation in China. It is expected 70,000 units with be sold in China in the first year, rising by 10% per year for the next three years.

The joint venture would also sell an expected 30,000 units per year to Cyprus at a constant price of 30 Euros (€) per unit. GoGo currently exports similar luxury perfumes to Cyprus, providing a pre-tax contribution of £100,000 per year. Because of the cheaper price of luxury perfume manufactured in China it is expected that 60% of these exports would be lost.

Provision of initial technical assistance would cost GoGo £90,000, and ongoing aid would cost £30,000 per year in salaries, at current prices. Neither would be tax allowable expenses in China, although the salaries would be tax allowable in the UK. Use of the patent would have no cash cost but would mean that the patent could not be sold to another company which was willing to pay a constant sum of £55,000 per year for the patent.

In year 1, direct costs in China will be 200 Yuans per un