43.

PROFILE ON TRANSMISSION BELT

 43 - 2

TABLE OF CONTENTS

PAGE

I. SUMMARY 43-3

II. PRODUCT DESCRIPTION & APPLICATION 43-3

III. MARKET STUDY AND PLANT CAPACITY 43-4

A. MARKET STUDY 43-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 43-6

IV. MATERIALS AND INPUTS 43-7

A. RAW MATERIALS 43-7
B. UTILITIES 43-7

V. TECHNOLOGY & ENGINEERING 43-8

A. TECHNOLOGY 43-8
B. ENGINEERING 43-9

VI. MANPOWER & TRAINING REQUIREMENT 43-12

A. MANPOWER REQUIREMENT 43-12
B. TRAINING REQUIREMENT 43-13

VII. FINANCIAL ANLYSIS 43-14

A. TOTAL INITIAL INVESTMENT COST 43-14
B. PRODUCTION COST 43-15
C. FINANCIAL EVALUATION 43-16
D. ECONOMIC BENEFITS 43-18
 43 - 3

I. SUMMARY

This profile envisages the establishment of a plant for the production of transmission
belts with a capacity of 154 tonnes per annum. A transmission belt is a looped strip of
flexible material, used to mechanically link two or more rotating shafts.

The major raw material required is natural and synthetic rubber which have to be
imported for the short term. In the medium term the plant will acquire the natural rubber
from the projects already under implementation in SNNPR and other regions of the
country.

The present demand for the proposed product is estimated at 551.39 tonnes per annum.
The demand is expected to reach at 1,190 tonnes by the year 2018.

The total investment requirement is estimated at Birr 12.19 million, out of which Birr
6.98 million is required for plant and machinery. The plant will create employment
opportunities for 64 persons.

The project is financially viable with an internal rate of return (IRR) of 21.62 % and a
net present value (NPV) of Birr 6.04 million, discounted at 8.5%.

The project creates forward linkage with the industrial, agricultural, and construction
sectors. The establishment of such factory will have a foreign exchange saving effect to
the country by substituting the current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

Transmission belts are used for power transmission purposes by connecting driving and
driven pulleys of machinery. Transmission pulleys are widely used in industrial,
agricultural, construction and other operations to transmit power. Of the various types of
belts in use V- belt is considered for this project as it is the type (according to the market
study) more in demand.
 43 - 4

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Since there is no plant in the country that produces transmission belt the requirement of
the country is entirely met through import. A variety of transmission belts including
endless Ribbed, not V ribbed and synchronous are imported. Import of transmission belt
during the past seven years is shown in Table 3.1.

Table 3.1
IMPORT OF TRANSMISSION BELT (KG)

Year Import
2000 187,203
2001 163,371
2002 127,699
2003 325,529
2004 307,291
2005 270,882
2006 455,701
Source: - Customs Authority.

Import of transmission belt during the past seven years has shown a general increasing
trend although it is characterized by fluctuations. The yearly average level of import
during the period 2000-2002 was around 160 thousand kilograms and increased to a
yearly average of about 301 thousand kilograms during the period 2003-2005. The
quantity imported in the year 2006 has sharply increased to 455.7 thousand kilograms.
Compared to the average yearly import of the period 2003-2005, there is a total increase
of about 51% or annual growth of about 13%.
 43 - 5

To determine the current (2008) demand the following methodology is adopted.

 Since import has been generally rising the imported quantity during year 2006
is taken as the affective demand for that year.
 A 10% growth rate in the past two years (which is less than the observed trend
in the recent past four years) is applied on the base year of 2006 to arrive at
the current demand.
Accordingly, current demand for transmission belts is set at 551,397 kg.

2. Projected Demand

Transmission belts are widely used in industrial, agricultural, construction and other
operations as a source of motion, to efficiently transmit power, or to track relative
movements. Hence, the demand for the product is expected to grow parallel with the
development of these sectors. The industrial, agricultural and construction sectors in the
past few years has been growing by 8 to 10% per annum and are planned to grow in the
future from 7-12% per annum. Considering this an 8% annual average growth of demand
for the product is taken to forecast the future demand (see Table 3.2).

Table 3.2
PROJECTED DEMAND FOR TRANSMISSION BELT ( TONNES)

Year Project Demand

2009 595.5
2010 643.1
2011 694.6
2012 750.2
2013 810.2
2014 875.0
2015 945.0
2016 1,020.6
2017 1,102.2
2018 1,190.4
 43 - 6

Demand for transmission belt of rubber will grow from 595.5 tonnes in the year 2009 to
750.2 tonnes and 945 tonnes by the year 2012 and year 2015, respectively. The demand
will reach at 1,190.4 tonnes by the year 2018.

3. Pricing and Distribution

The average CIF price of transmission belt as per the data of the Customs Authority is
Birr 55,207 per tonne which is adopted for sales revenue projection.

The product will find it market outlet through the existing industrial, agricultural,
transport and related materials and equipments distributing enterprises.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Based on the indications of the market study and the technology recommended the
production capacity of the envisaged plant is 154 ton of V- belts per annum. The
production is on the basis of three shifts (24 hours) per day and 300 working days per
year.

2. Production Programme

The production is scheduled to start with 75% and 85% of the installed capacity during
the first and second years respectively. Full production capacity will be attained in the
third year. The production programme takes into account the fact that the technology
would be new and that skill development and know-how would take sometime. The
production programme is shown in Table 3.3 below.
 43 - 7

Table 3.3
PRODUCTION PROGRAMME
(TONNES)

Production Year Year One Year Two Year Three and

then after
Quantity (Tonnes) 116 131 154
Capacity utilization (%) 75% 85% 100

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

Annual requirements for raw materials and the respective cost estimates are presented in
Table 4.1.

India and China are a few of the sources for the required raw material. Ethiopia is also
developing a rubber plantation and processing project at Guraferda woreda in SNNPRS
which is planned to replace the imported natural rubber in the medium term.

Table 4.1
RAW MATERIAL REQUIREMENT AND COST

Sr. Material Qty Cost, 000 Birr

No. (Tonnes) Foreign Local Total
1 Rubber(Natural & 205 3,300 - 3,300
Synthetic), chemicals

B. UTILITIES

Major utilities required for operation of the plant are electricity and water. Annual
utilities requirement of the plant at full production capacity and the respective estimated
costs are presented in Table 4.2.
 43 - 8

Table 4.2
UTILITIES REQUIREMENT AND COST

Unit
Sr. Material Unit of Rate Qty. Cost( Birr)
No. Measure
1 Electricity kWh 0.4736 144,000 68,198
3
2 Water m 3.25 3000 9,750
Total 51,965

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The process starts with a thin layer of cushion rubber sheet wound by a cord of
fabrics with slight tension. The cover cloth which is a woven jacketing fabric
rubberized by fractioning in a calendar is cut into strips and laid in the V grooves of
the ring mould .The groove is then filled with the extruded strip of filler rubber
compound. Trapezoidal section is formed at this stage. The ends are then joined
together.

The assembly is wrapped with nylon tape and the moulds are transferred to steam
vulcanizing chamber which would result in the finished product.

Belts of larger sizes are made on adjustable belt presses where more than a single
layer of cord fabric is used. A fabric cord coated with adhesive is cut to the desired
width, and the strips are wound in layers over filler and the cover cloth is sealed. The
belt is vulcanized in stages in hydraulic presses.

The process does not have any a diverse impact on environment.

 43 - 9

2. Source of Technology

Address of machinery supplier is given below:

National Research Development Corporation of India
20-22 Zamroodpur Community Center

B. ENGINEERING

1. Machinery and Equipment

Major plant machinery and equipment required for the manufacture of V- belts are listed
in table 5.1. The total cost of plant machinery and equipment is estimated to be about
Birr 6.98 million, out of which 5.93 million is required in foreign currency.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Description Qty. Cost(Birr)

No LC FC Price
(Birr)
1 Rubber Mixing Machine 1 135,000 765,000 900,000
2 Extruder 1 105,000 595,000 700,000
3 Calendar Roll 1 105,000 595,000 700,000
4 Bias Cutter 1 set 3,000 17,000 20,000
5 Case Making Machine 2 sets 15,000 85,000 100,000
6 Skiving Machine 5 sets 22,500 127,500 150,000
7 Covering Machine 5 sets 18,000 102,000 120,000
8 Autoclave 5 sets 22,500 127,500 150,000
9 Expanding drum 14 sets 12,000 68,000 80,000
10 Long Size Belt Making 3 sets
Machine 330,000 1,870,000 2,200,000
11 Belt Press 3 sets 112,500 637,500 750,000
12 Ring Mold 80 pcs. 36,000 204,000 240,000
13 Hydraulic Pump 3 sets 13,500 76,500 90,000
14 Flat Mold 6 sets 2,700 15,300 18,000
15 Boiler 1 112,500 637,500 750,000
16 Compressor 1 3,000 17,000 20,000
Total 1,048,200 5,939,800 6,988,000
 43 - 10

2. Land, Building and Civil Works

Total land area required for the plant is estimated to be 1000 sq. meters of which about
550m2 would be built- up area comprising 380m 2 for production hall, 90m2 and 80m2, for
store and office respectively. Building construction is estimated to cost about Birr 1.375
million assuming a construction rate of Birr2500/m2.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) 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.

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.
 43 - 11

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
blow 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.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 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 5.2 shows incentives for lease payment.
 43 - 12

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
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 period of lease for
industry is 60 years.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The total manpower requirement of the plant is 64 and the annual manpower cost is
estimated to be Birr 464,000.The details are shown in Table 6.1.
 43 - 13

Table 6.1
MANPOWR REQUIREMENT AND LABOUR COST

Sr. Description Req. Salary, Birr

No. No
Monthly Annual
1 Manager 1 3000 36,000
2 Secretary 1 1000 12,000
3 Rubber Technologist / Supervisor 1 2000 24,000
4 Operator 30 18000 216,000
5 Assistant Operator 18 6300 75,000
6 Technician 2 1200 14,400
7 Accountant 1 1500 18,000
8 Cashier 1 700 8400
9 Personnel 1 900 10,800
10 Salesman 1 1000 12,000
11 Store keeper 1 700 8,400
12 General Service 6 2400 28,800
Sub-Total 64 38,700 464,000
Employees benefit (25%) 116,000
Total 580,000

B. TRAINING REQUIREMENT

The supervisor and operators would require training for about two weeks during
commissioning of the plant on the technology and operation of machinery. Cost of
training would be about Birr 40,000; of which 50% (Birr 20,000) would be in foreign
currency.
 43 - 14

VII. FINANCIAL ANALYSIS

The financial analysis of the transmission belt 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 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material foreign 90 days
Work in progress 1 days
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
12.19 million, of which 49 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 43 - 15

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,375.00 - 1,375.00
3 Plant Machinery and Equipment 1048.20 5,939.80 6,988.00
4 Office Furniture and Equipment 125.00 - 125.00
5 Vehicle 200.00 - 200.00
6 Pre-production Expenditure* 792.37 20.00 812.37
7 Working Capital 618.50 - 618.50
Total Investment Cost 6,235.07 5,959.80 12,194.87

* N.B Pre-production expenditure includes interest during construction ( Birr 662.37

thousand), training (Birr 40 thousand ) and Birr 110 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 5.65
million (see Table 7.2). The cost of raw material account for 58.31% of the production
cost . The other major components of the production cost are depreciation, cost finance
and repair and maintenance which account for 15.02 %, 9.34% and 6.14 % respectively.
The remaining 11.17 % is the share of utility, direct labour, administration cost and
labour overhead cost.
 43 - 16

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
3,300.00 58.31
Utilities 51.97 0.92
Maintenance and repair
349.40 6.17
Labour direct 278.40 4.92
Labour overheads
116.00 2.05
Administration Costs 185.60 3.28
Land lease cost
- -
Total Operating Costs 4,281.37 75.64
Depreciation 850.05 15.02
Cost of Finance 528.44 9.34
Total Production Cost
5,659.86 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 1.18 million to Birr
1.95 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 17.14 million.

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 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
 43 - 17

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 of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 24 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover 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 return that could be earned by alternate investments or putting the money
 43 - 18

in a bank account. Accordingly, the IRR of this porject is computed to be 21.62 %

indicating the vaiability 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
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 6.04 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 64 persons. In addition to supply of the domestic
needs, the project will generate Birr 1.24 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 creates forward linkage with the industrial,
agricultural, and construction sectors