9.

PROFILE ON THE PRODUCTION OF

COMPOSITE FLOUR
 9-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 9-2

II. PRODUCT DESCRIPTION & APPLICATION 9-2

III. MARKET STUDY AND PLANT CAPACITY 9-3

A. MARKET STUDY 9-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 9-6

IV. MATERIALS AND INPUTS 9-7

A. RAW & AUXILIARY MATERIALS 9-7
B. UTILITIES 9-9

V. TECHNOLOGY & ENGINEERING 9-9

A. TECHNOLOGY 9-9
B. ENGINEERING 9-10

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 9-15

A. HUMAN RESOURCE REQUIREMENT 9-15
B. TRAINING REQUIREMENT 9-16

VII. FINANCIAL ANLYSIS 9-16

A. TOTAL INITIAL INVESTMENT COST 9-16
B. PRODUCTION COST 9-17
C. FINANCIAL EVALUATION 9-18
D. ECONOMIC & SOCIAL BENEFITS 9-20

I. SUMMARY
 9-3

This profile envisages the establishment of a plant for the production of composite flour with a
capacity of 2,500 tons per annum. Composite flour is a finely ground meal of cereal crops such
as wheat, rye, maize, soybean, sorghum, rice, etc obtained by milling and blending different
streams.

The country`s requirement of composite flour is met through local production and import. The
present (2012) demand for composite flour is estimated at 59,982 tons. The demand for the
product is projected to reach 72,976 tons and 88,787 tons by the years 2017 and 2022,
respectively.

The principal raw materials required are wheat, maize, sorghum and soya beans which are
locally available.

The total investment cost of the project including working capital is estimated at Birr 28.77
million. From the total investment cost the highest share (Birr 19.87 million or 69.06%) is
accounted by fixed investment cost followed by initial working capital (Birr 6.67 million or
23.18%) and pre operation cost (Birr 2.23 million or 7.76%). From the total investment cost
Birr 8.4 million or 29.20% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 32.51% and a net
present value (NPV) of Birr 33.01 million discounted at 10%.

The project can create employment for 56 persons. The project will generate Birr 19.31 million
in terms of tax revenue. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports. The project will also create backward
linkage with the agricultural sector and also generates income for the Government in terms of
tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Composite flour is a finely ground meal of cereal crops such as wheat, rye, maize, soybean,
sorghum, rice, etc obtained by milling and blending different streams. Flour contains various
nutrients such as starch, carbohydrates, minerals, proteins and others. Composite flour has
 9-4

better nutritional value in respect to elements of minerals, vitamins, fibers, proteins and the like
than flour milled from any specific cereal alone. It can be consumed by infants, adults, and the
old. Composite flour is a resource based project that will substitute the import of same.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Demand for composite flours in Ethiopia is met by domestic production and through imports.
Some of the locally produced flours having a composite preparation are known as Faffa, Dube,
Edget, and Meten. Comprehensive data on domestic production of composite flour is not
provided on its own. Rather, mostly it is found mixed with flour in general. Production of flour
in recent period is shown in Table 3.1.

Table 3.1
DOMESTIC PRODUCTION OF FLOUR (TONS)

Year Production

2001/02 152,648
2002/03 152,929
2003/04 174,466
2004/05 161,614
2005/06 188,561
2006/07 159,968
2007/08 169,325
2008/09 281,736
2009/10 365,668

Source:- CSA, Large and Medium Scale Manufacturing and Electricity

Industries Survey, various Issues.
 9-5

It can be seen from the table that domestic production of flour was 152,648 tons at the
beginning of 2000s and reached level of 365,668 tons by the close of the decade (2009/10).
Production generally exhibited rising pattern over the period (average growth rate of 13.8%). A
closer observation of the data set reveals that there were two marked phases i.e., 2001/02-
2007/08 & 2008/09-2009/10. In the first phase, production grew with minor fluctuations where
as towards the end (second phase) production increased steeply. To estimate production in 2012
average growth rate of the period was applied on 2009/10 production level. Accordingly,
production of flour in 2012 was estimated at 473,556 tons. According to the information from
distributors and retailers about 12% of the flour is covered by composite flours. Hence,
production of composite flour in 2012 was estimated at 56,826 tons.

To meet the unsatisfied demand Ethiopia also imports composite flours. However, import
statistics on composite flour is not separately provided by Ethiopian Revenue and Customs
Authority. Hence, import of flour in general is used in the analysis. Import of flour is shown in
Table 3.2.
Table 3.2
IMPORT OF FLOUR (TONS)

Year Import
2001 64,866
2002 15,895
2003 123,442
2004 25,629
2005 1,118
2006 3,747
2007 2,815
2008 18,052
2009 109,432
2010 12,333
2011 67,584

Source: -Ethiopian Revenue and Customs Authority.

 9-6

Table 3.2 shows that level of import at end of the period (2011) has not changed much from the
start of the period (2001) - difference of just about 3,000 tons. A closer look at the data reveals
import of flour is characterized by cyclical movements. Import at 2001 was about 65 thousand
tons, it dropped to about 16 thousand the following year then it went up to 123,442 tons. This
was followed by continuous decline with some fluctuations until it again hit 109,432 tons in
2009 and which was followed by a decline. The relatively more recent figures are likely to
capture the relevant magnitude. Hence, taking the average of the last three years under analyses
as a point of reference, import of flour originating from overseas in the year 2012 was
estimated at 63,116 tons. According to knowledgeable operators in the subsector, the
magnitude of import of composite flour is around 5% of flour import. Based on this, import of
composite flour in 2012 is estimated at 3,155.8 tons.

Thus, summing up domestic production and import estimates, aggregate supply or apparent
consumption of composite flour will be 59,981.8 tons. Hence, this figure has been taken as
effective demand of composite flour.

2. Demand Projection

Flour demand in general and composite flour demand in particular, is mainly determined by the
growth rate of population and the per capita income. Since both these factors are growing, the
combined effect will be multiplicative. Moreover, in view of the heavy reliance of current
consumption on a single or few types of floor, a move to a more diversified menu (mix) is
expected to attain the objective of balanced diet. Therefore, a growth rate of 4% is used to
project future demand for composite flour. Domestic production of existing firms is assumed to
remain at 2012 level (56,826 tons). Demand forecast, domestic production and unsatisfied
demand is shown in Table 3.3.
 9-7

Table 3.3
PROJECTED DEMAND FOR COMPOSITE FLOUR (TONS)

Year Projected Domestic Unsatisfied

Demand Production Demand
2013 62,380 56,826 5,554
2014 64,875 56,826 8,049
2015 67,470 56,826 10,644
2016 70,169 56,826 13,343
2017 72,976 56,826 16,150
2018 75,895 56,826 19,069
2019 78,931 56,826 22,105
2020 82,088 56,826 25,262
2021 85,372 56,826 28,546
2022 88,787 56,826 31,961

3. Pricing and Distribution

Locally produced composite flours such as “Dube” are sold at an average price of Birr 19 per
kg in retail shops. Allowing 30 % profit margin for distributors and retailers an ex-factory
price of Birr 14.62 per kg is recommended for the envisaged project.

The envisaged plant can use the wholesale and retail networks, which includes department
stores, merchandise shops and super markets to distribute its product.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

Based on demand projection in the market study and considering the minimum economic scale
of production, the envisaged plant will have a production capacity of 2,500 tons per annum.
This capacity is proposed on a basis of a single shift of 8 hours per day and 300 working days
per annum. The volume of production can be increased by increasing the number of shifts, if
the market demand grows. The average extraction rate of composite flour and bran is taken to
be 85% and 15%, respectively.
 9-8

2. Production Program

The plant will start operation at 85% of its rated capacity which will grow to 90% in the second
year. Full capacity production will be achieved in the third year and onwards. Details of annual
production program are shown in Table 3.4.

Table 3.4
ANNUAL PRODUCTION PROGRAM

Sr. Description Unit of Production Year

No. Measur 1st 2nd 3rd &
e Onwards
1 Composite flour ton 2,12 2,25 2,500
5 0
2 Bran ton 375 397 441
3 Capacity % 85 90 100
utilization rate

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

For the purpose of identifying the annual raw materials requirement of the current project,
composite flour shall be produced from wheat, maize, sorghum and soya beans. The impurity
rate shall be made not to exceed 5%. The proportion of the composite grains will be 50%
wheat, 30% maize, 15% Soya beans, and 5% sorghum. The annual requirement for raw
materials at full production capacity and the estimated costs are given in Table 4.1.
 9-9

Table 4.1
ANNUAL RAW MATERIALS REQUIREMENT AT FULL CAPACITY PRODUCTION
AND ESTIMATED COST

Sr. Description Unit of Required Unit Cost ( '000 Birr)

No. Measure Qty. Price, F. L. C. Total
Birr/Unit C.
1 Wheat ton 1,470.59 8,200.00 12,058.83 12,058.83
2 Maize ton 882.35 3,960.00 3,494.10 3,494.10
3 Soya bean ton 441.18 14000.00 6,176.52 6,176.52
4 Sorghum ton 147.06 5,600.00 823.53 823.53
Total 22,552.98 22,553.00

The major auxiliary materials required for the plant are packing materials which mainly
comprise (pp bags) of 50 kg, 10kg and 5kg for flour. These packing materials can be obtained
from local manufacturers.

The annual auxiliary materials requirement at full capacity production and corresponding
estimated costs are given in Table 4.2.

Table 4.2
ANNUAL AUXILIARY MATERIALS REQUIREMENT AT FULL CAPACITY
PRODUCTION AND ESTIMATED COSTS

Sr. Description Unit of Require Unit Cost,('000 Birr)

No. Measur d Qty Price, F.C. L.C. Total
e Birr/Unit
1 50 kg pc 25,000 4.50 90.00 22.50 112.50
polypropylene bag
2 10 kg pc 62,500 3.20 160.00 40.00 200.00
polypropylene bag
3 5 kg polypropylene pc 125,000 1.70 170.00 42.50 212.50
bag
Total 420.00 105.00 525.00
 9-10

B. UTILITIES

The major utilities required by the plant are electric power, water, and oil and lubricants.
Electric power will be used to run the production equipment, and for lighting. Water will be
used for the production process and for general use. Oil and lubricants are required for
production equipment. The annual requirement for utilities at full production capacity of the
plant along with the estimated costs is shown in Table 4.3.

Table 4.3
ANNUAL UTILITIES REQUIREMENT AND ESTIMATED COSTS

Sr. Description Unit of Required Unit Cost, ('000 Birr)

No. Measure Qty Price, F.C. L.C. Total
Birr/Unit
1 Electric power kWh 90,000 0.58   52.2 52.2
2 Water m3 150 10.00   1.5 1.5
3 Oil and lt 40 112.00   4.48 4.48
lubricants
Total   58.18 58.18

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The major unit operations involved in the production of composite flour comprise grain intake
and pre - cleaning, cleaning and preparation, milling, blending, packing and dispatching. Each
unit operation is discussed briefly as follows.
 9-11

Grain Intake and Pre – cleaning: The major operations involved are dumping, conveying,
weighing, pre-cleaning, collecting in storage silos or transferring to the working bins of the
cleaning room.

Grain Cleaning and Preparation: The main operations involved are weighing, screening,
destoning, long and round impurity separation, ferromagnetic particles separation, scouring,
aspiration, dampening, tempering and entoleting. In the grain cleaning room, sieves of
different aperture sizes can be interchangeably used for screening of impurities of different
grains.

Milling: Major operations are weighing, breaking open, scalping, scratching, detaching, sifting,
purifying, milling (grinding), resifting and entoleting.

Blending: Flour of different grains and / or different streams of wheat flour are blended in the
required proportion. Weighing or volumetric measuring of the product is carried out prior to
blending.

Packing and Dispatching: The major operations involved are collection of flour of different
cereal grains, mixing and aeration (recycling), resifting, entoleting, packing, sewing, loading
and dispatching.

2. Environmental Impact

The plant does not have any pollutant emitted from the production process. Thus the envisaged
project is environment friendly.

B. ENGINEERING

1. Machinery and Equipment

The major plant machinery and equipment required for the envisaged plant include grain
cleaning and conveying equipment, roller mills, plansifters, purifiers, flour filters, pneumatic
conveyors and ducts, etc. List of plant machinery and equipment and corresponding estimated
costs are given in Table 5.1.
 9-12

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND ESTIMATED COST

Sr. Description Unit of Require Cost, ('000 Birr)

No. Measur d Qty F.C. L.C. Total
e
1 Screw conveyor for wheat set 5.0 588.0 147.0 735.0
2 Separator set 2.0 420.0 105.0 525.0
3 Weigher set 5.0 420.0 105.0 525.0
4 Trieur cylinder, battery of set 1.0 504.0 126.0 630.0
cylinders
5 Scourer set 2.0 420.0 105.0 525.0
6 Bucket elevator for wheat set 6.0 588.0 147.0 735.0
7 Roller mill set 27.0 756.0 189.0 945.0
8 Plan sifter set 2.0 504.0 126.0 630.0
9 Purifier set 2.0 420.0 105.0 525.0
10 Bran finisher set 4.0 420.0 105.0 525.0
11 Flour cyclone with airlock set 27.0 504.0 126.0 630.0
12 Flour filter set 1.0 420.0 105.0 525.0
13 Detacher set 8.0 588.0 147.0 735.0
14 Pneumatic conveyor set 1.0 420.0 105.0 525.0
15 Screw conveyor for flour and bran set 4.0 504.0 126.0 630.0
16 Bucket elevator for flour set 2.0 420.0 105.0 525.0
17 Pneumatic duct, complete with set 1.0 504.0 126.0 630.0
joints
Total 8,400.0 2,100.0 10,500.0

2. Land, Buildings and Civil Works

Total area of land required for the plant is 2,500 square meters out of which 1,800 square
meters is built – up area. The construction cost of buildings and civil works at a rate of Birr
4,500 per square meter is estimated at Birr 8.1 million.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation No
721/2004) in principle, urban land permit by lease is on auction or negotiation basis, however,
the time and condition of applying the proclamation shall be determined by the concerned
regional or city government depending on the level of development.
 9-13

The legislation has also set the maximum on lease period and the payment of lease prices. The
lease period ranges from 99 years for education, cultural research health, sport, NGO ,
religious and residential area to 80 years for industry and 70 years for trade while the lease
payment period ranges from 10 years to 60 years based on the towns grade and type of
investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the entire
amount of the lease will receive 0.5% discount from the total lease value and those that pay in
installments will be charged interest based on the prevailing interest rate of banks. Moreover,
based on the type of investment, two to seven years grace period shall also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting the
maximum has conferred on regional and city governments the power to issue regulations on the
exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the manufacturing
sector, industrial zone preparation is one of the strategic intervention measures adopted by the
City Administration for the promotion of the sector and all manufacturing projects are assumed
to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is below
5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However, if the
land request is above 5,000 m2 the request is evaluated by the City’s Investment Authority and
passed with recommendation to the Land Development and Administration Authority for
decision, while the lease price is the same for both cases.

Moreover, the Addis Ababa City Administration has recently adopted a new land lease floor
price for plots in the city. The new prices will be used as a benchmark for plots that are going
to be auctioned by the city government or transferred under the new “Urban Lands Lease
Holding Proclamation.”

The new regulation classified the city into three zones. The first Zone is Central Market District
Zone, which is classified in five levels and the floor land lease price ranges from Birr 1,686 to
 9-14

Birr 894 per m2. The rate for Central Market District Zone will be applicable in most areas of
the city that are considered to be main business areas that entertain high level of business
activities.

The second zone, Transitional Zone, will also have five levels and the floor land lease price
ranges from Birr 1,035 to Birr 555 per m 2 .This zone includes places that are surrounding the
city and are occupied by mainly residential units and industries.

The last and the third zone, Expansion Zone, is classified into four levels and covers areas that
are considered to be in the outskirts of the city, where the city is expected to expand in the
future. The floor land lease price in the Expansion Zone ranges from Birr 355 to Birr 191 per
m2 (see Table 5.2).

Table 5.2
NEW LAND LEASE FLOOR PRICE FOR PLOTS IN ADDIS ABABA

Floor
Zone Level price/m2
1st 1686
2nd 1535
Central Market
District 3rd 1323
4th 1085
5th 894
1st 1035
2nd 935
Transitional zone 3rd 809
4th 685
5th 555
1st 355
2nd 299
Expansion zone
3rd 217
4th 191
 9-15

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all
new manufacturing projects will be located in industrial zones located in expansion zones.
Therefore, for the profile a land lease rate of Birr 266 per m 2 which is equivalent to the average
floor price of plots located in expansion zone is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period and
extending the lease payment period. The criterions are creation of job opportunity, foreign
exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.

Table 5.3
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored Point Period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile, the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The land lease period for industry
is 60 years.

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 665,000 of
which 10% or Birr 66,500 will be paid in advance. The remaining Birr 598,500 will be paid in
equal installments with in 28 years i.e. Birr 21,375 annually.
 9-16

VI. HUMAN RESOURCE AND TRAINING REQUIREMENT

A. HUMAN RESOURCE REQUIREMENT

The total human resource requirement of the envisaged plant is 56 persons. Details of human
resource requirement and the estimated annual labor cost, including fringe benefits, are given in
Table 6.1.

TABLE 6.1
HUMAN RESOURCE REQUIREMENT AND LABOR COST

Require Salary ( in Birr )

Sr. d
Job Title
No. No. of Monthly Annual
Persons
1 Plant manager 1 4,000 48,000
2 Secretary 1 900 10,800
3 Personnel 1 950 11,400
4 Salesman 2 1,800 21,600
5 Store keeper 2 1,600 19,200
6 Purchaser 1 800 9,600
7 Accountant 2 1,900 22,800
8 Cashier 1 900 10,800
9 Production supervisor 1 1,800 21,600
10 Quality controller (Chemist) 2 3,000 36,000
11 Production shift leader 3 3,600 43,200
12 Operator 9 4,500 54,000
13 Laborer 15 6,000 72,000
14 Cleaning worker 2 800 9,600
15 Mechanic 3 2,850 34,200
16 Electrician 3 2,850 34,200
17 Driver 1 800 9,600
18 Guard 6 2,400 28,800
Sub - Total 56 41,450 497,400
Employees benefit, 20% of basic salary 10,363 124,350
Total 51,813 621,750
 9-17

B. TRAINING REQUIREMENT

Three production shift leaders, two quality controllers, four operators, three mechanics, and
three electricians should be given two weeks on - the - job training by the personnel of
machinery supplier on technological process, machinery operation, maintenance and quality
aspects. The cost of training is estimated to be Birr 160,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the composite flour project is based on the data presented in the
previous chapters and the following assumptions:-
Construction period 1 year
Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 day
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 28.77
million (See Table 7.1). From the total investment cost the highest share (Birr 19.87 million or
69.06%) is accounted by fixed investment cost followed by initial working capital (Birr 6.67
million or 23.18%) and pre operation cost (Birr 2.23 million or 7.76%). From the total
investment cost Birr 8.4 million or 29.20% is required in foreign currency.
 9-18

Table 7.1

INITIAL INVESTMENT COST (‘000 Birr)

Local Foreign Total %

Sr.No. Cost Items Cost Cost Cost Share
1 Fixed investment        
1.1 Land Lease 66.50   66.50 0.23
1.2 Building and civil work 8,100.00   8,100.00 28.16
8,400.0
1.3 Machinery and equipment 2,100.00 0 10,500.00 36.50
1.4 Vehicles 900.00   900.00 3.13
1.5 Office furniture and equipment 300.00   300.00 1.04
  Sub total 11,466.50 8,400.00 19,866.50 69.06
2 Pre operating cost *        
2.1 Pre operating cost 351.15   790.00 2.75
2.2 Interest during construction 1,882.07   1,882.07 6.54
  Sub total 2,233.22   2,233.22 7.76
3 Working capital ** 6,669.05   6,669.05 23.18
  Grand Total 20,368.77 8,400.00 28,768.77 100

* N.B Pre operating cost include project implementation cost such as installation, startup,
commissioning, project engineering, project management etc and capitalized interest during
construction.
** The total working capital required at full capacity operation is Birr 7.95 million. However,
only the initial working capital of Birr 6.66 million during the first year of production is
assumed to be funded through external sources. During the remaining years the working
capital requirement will be financed by funds to be generated internally (for detail working
capital requirement see Appendix 7.A.1).

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 30.43 million (see
Table 7.2). The cost of raw material account for 76.80% of the production cost. The other
major components of the production cost are depreciation and financial cost, which account for
9.00% and 6.03% respectively. The remaining 8.17% is the share of labor, utility, repair and
maintenance, labor overhead and administration cost. For detail production cost see Appendix
7.A.2.
 9-19

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE) (in Birr ‘000’)

Items Cost
(in 000 Birr) %
Raw Material and Inputs
23,078 76.80
Utilities
58 0.19
Maintenance and repair
525 1.75
Labor direct
497 1.66
Labor overheads
124 0.41
Administration Costs
500 1.66
Land lease cost
0 0.00
Cost of marketing and distribution 750 2.50
Total Operating Costs
25,533 84.97
Depreciation
2,704 9.00
Cost of Finance
1,811 6.03
Total Production Cost
30,049 100.00

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit throughout its
operation life. Annual net profit after tax ranges from Birr 4.73 million to Birr 7.45 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 71.25 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick for
evaluating the financial position of a firm. It is also an indicator for the strength and weakness
 9-20

of the firm or a project. Using the year-end balance sheet figures and other relevant data, the
most important ratios such as return on sales which is computed by dividing net income by
revenue, return on assets (operating income divided by assets), return on equity (net profit
divided by equity) and return on total investment (net profit plus interest divided by total
investment) has been carried out over the period of the project life and all the results are found
to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues. It
indicates the level at which costs and revenue are in equilibrium. To this end, the break-even
point for capacity utilization and sales value estimated by using income statement projection
are computed as followed.

Break -Even Sales Value = Fixed Cost + Financial Cost = Birr 15,351,000
Variable Margin ratio (%)

Break- Even Capacity utilization = Break- even Sales Value X 100 = 29.36%
Sales revenue
4. Pay-back Period

The pay-back period, also called pay – off period is defined as the period required for
recovering the original investment outlay through the accumulated net cash flows earned by the
project. Accordingly, based on the projected cash flow it is estimated that the project’s initial
investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that can be
earned on the invested capital, i.e., the yield on the investment. Put another way, the internal
rate of return for an investment is the discount rate that makes the net present value of the
investment's income stream total to zero. It is an indicator of the efficiency or quality of an
investment. A project is a good investment proposition if its IRR is greater than the rate of
 9-21

return that could be earned by alternate investments or putting the money in a bank account.
Accordingly, the IRR of this project is computed to be 32.51% indicating the viability of the
project.

6. Net Present Value

Net present value (NPV) is defined as the total present (discounted) value of a time series of
cash flows. NPV aggregates cash flows that occur during different periods of time during the
life of a project in to a common measuring unit i.e. present value. It is a standard method for
using the time value of money to appraise long-term projects. NPV is an indicator of how
much value an investment or project adds to the capital invested. In principle, a project is
accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 10% discount rate is found to be Birr 33.01
million which is acceptable. For detail discounted cash flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

The project can create employment for 56 persons. The project will generate Birr 19.31 million
in terms of tax revenue. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports. The project will also create backward
linkage with the agricultural sector and also generates income for the Government in terms of
payroll tax.
 9-22

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 9-22

Appendix 7.A.1
NET WORKING CAPITAL ( in 000 Birr)

Items Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Total inventory 4,904.08 5,192.55 5,769.50 5,769.50 5,769.50 5,769.50 5,769.50 5,769.50 5,769.50 5,769.50

Accounts receivable 1,817.96 1,921.22 2,127.74 2,127.74 2,129.53 2,129.53 2,129.53 2,129.53 2,129.53 2,129.53

Cash-in-hand 19.44 20.58 22.87 22.87 23.17 23.17 23.17 23.17 23.17 23.17

CURRENT ASSETS 6,741.47 7,134.35 7,920.12 7,920.12 7,922.19 7,922.19 7,922.19 7,922.19 7,922.19 7,922.19

Accounts payable 72.42 76.68 85.20 85.20 85.20 85.20 85.20 85.20 85.20 85.20
CURRENT
LIABILITIES 72.42 76.68 85.20 85.20 85.20 85.20 85.20 85.20 85.20 85.20
TOTAL WORKING
CAPITAL 6,669.05 7,057.67 7,834.92 7,834.92 7,836.99 7,836.99 7,836.99 7,836.99 7,836.99 7,836.99
 9-23

Appendix 7.A.2
PRODUCTION COST ( in 000 Birr)

Item Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Raw Material and Inputs 19,616 20,770 23,078 23,078 23,078 23,078 23,078 23,078 23,078 23,078

Utilities 49 52 58 58 58 58 58 58 58 58

Maintenance and repair 446 473 525 525 525 525 525 525 525 525

Labour direct 423 448 497 497 497 497 497 497 497 497

Labour overheads 106 112 124 124 124 124 124 124 124 124

Administration Costs 425 450 500 500 500 500 500 500 500 500

Land lease cost 0 0 0 0 21 21 21 21 21 21

Cost of marketing
and distribution 750 750 750 750 750 750 750 750 750 750

Total Operating Costs 21,815 23,055 25,533 25,533 25,554 25,554 25,554 25,554 25,554 25,554

Depreciation 2,704 2,704 2,704 2,704 2,704 354 354 354 354 354

Cost of Finance 0 2,070 1,811 1,553 1,294 1,035 776 518 259 0

Total Production Cost 24,520 27,829 30,049 29,790 29,552 26,943 26,685 26,426 26,167 25,908

Appendix 7.A.3
 9-24

INCOME STATEMENT ( in 000 Birr)

Year Year Year YearYear Year Year Year

Item 2 3 4 5 6 7 8 9 Year 10 Year 11
36,55
Sales revenue 31,068 32,895 36,550 36,550 0 36,550 36,550 36,550 36,550 36,550
24,78
Less variable costs 21,065 22,305 24,783 24,783 3 24,783 24,783 24,783 24,783 24,783
11,76
VARIABLE MARGIN 10,002 10,590 11,767 11,767 7 11,767 11,767 11,767 11,767 11,767
in % of sales revenue 32.19 32.19 32.19 32.19 32.19 32.19 32.19 32.19 32.19 32.19
Less fixed costs 3,454 3,454 3,454 3,454 3,476 1,125 1,125 1,125 1,125 1,125

OPERATIONAL MARGIN 6,548 7,136 8,313 8,313 8,291 10,642 10,642 10,642 10,642 10,642
in % of sales revenue 21.08 21.69 22.74 22.74 22.69 29.12 29.12 29.12 29.12 29.12
Financial costs   2,070 1,811 1,553 1,294 1,035 776 518 259 0
GROSS PROFIT 6,548 5,066 6,501 6,760 6,998 9,607 9,865 10,124 10,383 10,642
in % of sales revenue 21.08 15.40 17.79 18.50 19.15 26.28 26.99 27.70 28.41 29.12
Income (corporate) tax 0 0 0 2,028 2,099 2,882 2,960 3,037 3,115 3,193
NET PROFIT 6,548 5,066 6,501 4,732 4,898 6,725 6,906 7,087 7,268 7,449
in % of sales revenue 21.08 15.40 17.79 12.95 13.40 18.40 18.89 19.39 19.89 20.38
 9-25

Appendix 7.A.4
CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr)

Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Scrap
TOTAL CASH INFLOW 20,218 39,691 32,899 36,559 36,550 36,550 36,550 36,550 36,550 36,550 36,550 14,646
Inflow funds 20,218 8,624 4 9 0 0 0 0 0 0 0 0
Inflow operation 0 31,068 32,895 36,550 36,550 36,550 36,550 36,550 36,550 36,550 36,550 0
Other income 0 0 0 0 0 0 0 0 0 0 0 14,646
TOTAL CASH
OUTFLOW 20,218 30,439 28,106 30,718 31,702 31,537 32,059 31,878 31,697 31,516 28,747 0
Increase in fixed assets 20,218 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 6,741 393 786 0 2 0 0 0 0 0 0
Operating costs 0 21,065 22,305 24,783 24,783 24,804 24,804 24,804 24,804 24,804 24,804 0
Marketing and
Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income tax 0 0 0 0 2,028 2,099 2,882 2,960 3,037 3,115 3,193 0
Financial costs 0 1,882 2,070 1,811 1,553 1,294 1,035 776 518 259 0 0
Loan repayment 0 0 2,588 2,588 2,588 2,588 2,588 2,588 2,588 2,588 0 0
SURPLUS (DEFICIT) 0 9,252 4,794 5,840 4,848 5,013 4,491 4,672 4,853 5,034 7,803 14,646
CUMULATIVE CASH
BALANCE 0 9,252 14,046 19,886 24,735 29,747 34,238 38,910 43,763 48,797 56,600 71,246

Appendix 7.A.5
 9-26

DISCOUNTED CASH FLOW ( in 000 Birr)

Year Year Year Year Year Scra

Item Year 1 2 Year 3 4 Year 5 6 Year 7 8 Year 9 10 Year 11 p
14,64
TOTAL CASH INFLOW 0 31,068 32,895 36,550 36,550 36,550 36,550 36,550 36,550 36,550 36,550 6
Inflow operation 0 31,068 32,895 36,550 36,550 36,550 36,550 36,550 36,550 36,550 36,550 0
14,64
Other income 0 0 0 0 0 0 0 0 0 0 0 6

TOTAL CASH OUTFLOW 26,887 22,204 23,832 25,533 27,563 27,654 28,436 28,514 28,592 28,669 28,747 0
Increase in fixed assets 20,218 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 6,669 389 777 0 2 0 0 0 0 0 0 0
Operating costs 0 21,065 22,305 24,783 24,783 24,804 24,804 24,804 24,804 24,804 24,804 0

Marketing and Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income (corporate) tax   0 0 0 2,028 2,099 2,882 2,960 3,037 3,115 3,193 0
14,64
NET CASH FLOW -26,887 8,863 9,063 11,017 8,987 8,896 8,114 8,036 7,958 7,881 7,803 6
- 74,37
CUMULATIVE NET CASH FLOW -26,887 18,023 -8,960 2,057 11,044 19,940 28,054 36,090 44,049 51,929 59,733 8
Net present value -26,887 8,058 7,490 8,277 6,138 5,524 4,580 4,124 3,713 3,342 3,008 5,646
- 33,01
Cumulative net present value -26,887 18,829 -11,339 -3,062 3,077 8,601 13,181 17,304 21,017 24,359 27,368 4

NET PRESENT VALUE 33,014

INTERNAL RATE OF RETURN 32.51%
NORMAL PAYBACK 4 years