Tsehay Agro Industries

Feasibility Study to Establish

Wheat Flour Mill, Infant Food and
Oil Mill

September, 2015

Consultant
SENYO Business PLC
Lideta on the way to Geja Sefer Abdella Building Room No. 501
Phone: +251 91 160 0631
E-mail: senyo.business@gmail.com
 TABLE OF CONTENTS

EXCUTIVE SUMMARY............................................................................................................................ 1
CHAPTER ONE – BACKGROUND......................................................................................................... 3
1.1 BACKGROUND OF THE PROJECT PROMOTER........................................................................3
1.2 THE PROJECT BACKGROUND.................................................................................................... 3
CHAPTER TWO – MARKET STUDY...................................................................................................... 5
2.1 PRODUCT DESCRIPTION............................................................................................................. 5
2.2 DEMAND ANALYSIS..................................................................................................................... 6
2.2.1 SUPPLY TREND...................................................................................................................... 6
2.2.2 PRESENT AND PROJECTED DEMAND................................................................................9
2.3 MARKETING MIX ASSESSMENT............................................................................................... 23
2.3.1 PRODUCT.............................................................................................................................. 23
2.3.2 DISTRIBUTION...................................................................................................................... 24
2.3.3 PRICING................................................................................................................................. 29
2.3.4 PROMOTION......................................................................................................................... 30
CHAPTER THREE – MATERIALS AND INPUTS.................................................................................33
3.1 DIRECT RAW MATERIAL............................................................................................................ 33
3.2 AUXILIARY RAW MATERIALS................................................................................................... 33
3.3 UTILITIES..................................................................................................................................... 34
3.4 MATERIAL AND INPUTS CONSUMPTIONS AND THEIR COSTS.............................................34
CHAPTER FOUR – TECHNOLOGY AND ENGINEERING...................................................................35
4.1 PRODUCTION PROCESS........................................................................................................... 35
4.1.1 WHEAT FLOUR PRODUCTION PROCESS.........................................................................35
4.1.2 INFANT FOODS PRODUCTION PROCESS.........................................................................38
4.1.3 OIL MILL PRODUCTION PROCESS.....................................................................................38
4.2 MACHINERY................................................................................................................................ 39
4.3 BUILDINGS AND CIVIL WORKS REQUIREMENT AND THEIR COSTS....................................40
4.3 VEHICLES.................................................................................................................................... 41
4.4 OFFICE FURNITURE AND EQUIPMENT....................................................................................42
CHAPTER FIVE – LOCATION AND SITE............................................................................................. 43
5.1 LOCATION AND SITE.................................................................................................................. 43
5.2 LAND LEASE FEES..................................................................................................................... 44
CHAPTER SIX – ENVIRONMENTAL AND SOCIAL MANAGEMENT PLAN........................................45
6.1 EFFLUENTS................................................................................................................................. 45
6.2 PREVENTION OF ACCIDENTAL RELEASE...............................................................................45
6.3 VIBRATION AND NOISE............................................................................................................. 46
6.4 SAFETY PLANNING.................................................................................................................... 47
6.5 HAZARD MANAGEMENT............................................................................................................ 47
 6.6 EXPLOSION AND FIRE HAZARDS............................................................................................. 49
6.7 ENVIRONMENTAL TRAININGS.................................................................................................. 50
CHAPTER SEVEN – ORGANIZATION STRUCTURE AND MANPOWER...........................................51
7.1 ORGANIZATION STRUCTURE................................................................................................... 51
7.2 STAFFING PLAN, SALARIES AND BENEFITS..........................................................................51
7.3 TRAINING..................................................................................................................................... 52
CHAPTER EIGHT – IMPLEMENTATION.............................................................................................. 54
8.1 IMPLEMENTATION SCHEDULE................................................................................................ 54
8.2 IMPLEMENTATION COST........................................................................................................... 56
CHAPTER NINE - FINANCIAL ANALYSES.......................................................................................... 57
9.1 BASIC ASSUMPTIONS FOR FINANCIAL ANALYSES..............................................................57
9.1.1 PROJECT LIFE...................................................................................................................... 57
9.1.2 REPAIR AND MAINTENANCE COST..................................................................................57
9.1.3 DEPRECIATION AND AMORTIZATION...............................................................................57
9.1.4 TERMINAL (SALVAGE VALUE)...........................................................................................57
9.1.5 WORKING CAPITAL............................................................................................................. 58
9.1.6 DISCOUNTING...................................................................................................................... 58
9.1.7 INCOME TAX......................................................................................................................... 58
9.2 RESULT OF FINANCIAL ANALYSIS..........................................................................................58
9.2.1 INVESTMENT COST............................................................................................................ 59
9.2.2 COST OF PRODUCTION...................................................................................................... 59
9.2.3 FINANCIAL FLOW.................................................................................................................. 60
9.2.4 CASH FLOW......................................................................................................................... 60
9.2.5 DISCOUNTED CASH FLOW................................................................................................... 60
9.2.6 PROFITABILITY................................................................................................................... 61
9.2.7 BALANCE SHEET................................................................................................................... 61
9.2.8 BREAK-EVEN ANALYSIS....................................................................................................... 61
9.2.9 RATIOS.................................................................................................................................. 62
9.2.10 SENSITIVITY ANALYSES................................................................................................... 62
FINANCIAL SCHEDULES..................................................................................................................... 63
ANNEXES ................................................................................................................................. 72

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 EXCUTIVE SUMMARY

The promoter of the present project, Tsehay Agro Industries intends to establish
Wheat Flour Mill, Infant Food and Oil Mill to supply for both local and export market.

Considering the available market and other factors, the capacity is selected to be a
capacity of 24,000 tons per annum wheat milling. Infant food lines of 500 kg per hour
and 20 tons per day Oil Mill which will refine 5 tons of oil per day in two
implementation phases.

The sole and major raw materials required are wheat, soybean, and oil seeds for
flour and oil production. Auxiliary PP bag 25kg is used for packing the wheat flour
and infant food, PP bag 40kg is used for packing the by-products bran and residual
cakes of oil seeds. The refined oil is packed in steel drums (200 lt).

Electric power and water are the major utilities required for the plant.

Technically, the promoter believes the use of automated machines would be

instrumental in terms of efficiency and effectiveness of the agro industry and related
sectors. The project bases itself on the use of high technology production lines to
better meet the current needs in the domestic and international market.

The plant is proposed to be located at Bahr Dar City. Essential facilities such as
power, water, and banking are available in the site.

The proposed plant will be managed by its own management team consisting of the
Plant Manager and three Division Managers. About 70 employees will be required
when the plant operates in full capacity. Out of the total employees 51 are production
workers and the rest 19 persons are support staff. The annual salary and fringe
benefit of these employees are Birr 2,235,000.

It is estimated that about six months would be required for the implementation of the
project including the preparation time, assuming project activities will be undertaken
as planned. The activities on the critical path of the implementation are applying and
approval of loan; detailed project planning; project engineering and design; tendering
and contracting; delivery and erection of machinery and equipment; and plant
commissioning.
The project is estimated to cost Birr 11.7 million including fixed investment, pre-
operation expenditures and working capital. The financing structure is assumed as
70% debt and 30% equity capital from the owners. At full capacity, the factory will
generate gross sales revenue of Birr 530 million, and a net profit after tax of Birr 31
million (1st year). The internal rate of return (IRR) of the project is calculated to be
1623% on equity capital and 544% on total investment. When discounted at a rate of
10%, the project generates a net present value (NPV) of Birr 389 million on both
equity capital and total investment. The simple payback period of the project is about
three years.

The financial analyses show that the project is highly profitable and viable. Even
though the project has high NPV and IRR, it is found to be sensitive to a decrease in
revenue and increase in production cost. Moreover, the project can comfortably
tolerate increase in the cost of production and yet earn good return on investment.

The entire components of the project are designed to be socially and economically
friendly that benefit the promoter and the country. As the plan involves use of
agricultural inputs and locally available ones, it is believed that the project will
contribute to stimulate production of wheat and oil seeds. Moreover the project
attempts to contribute its level best in protecting the environment through
diversification.

2
 CHAPTER ONE – BACKGROUND

1.1 BACKGROUND OF THE PROJECT PROMOTER

The promoter of the present project, Tsehay Agro Industries is an enterprise

established to carry out integrated investment and business activities in various
industrial and related sectors. The founder of Tsehay Agro Industries, Mr. Yaregal
Sintayehu is an experienced business leader with over 7 years of experience in the
fields of manufacturing. He had leading a number of business organizations before
he embarked on the current project. In general he has broad background in the
overall management of business organization.

The promoter intends to operate the present project as a full-fledged manufacturing

enterprise that would handle different services such as handling foreign purchases,
technical services for the plants and handling financial matters. Overall the promoter
has been profitable over the years, showing a good management capability. The
promoter uses Commercial Bank of Ethiopia and other private banks as its bankers
and has good working relationship with the banks.

1.2 THE PROJECT BACKGROUND

A steady growth of industry and trade has been registered in the past years in
Ethiopia due to an array of reforms and the opening up of the economy and the
creation of encouraging investment environment. There has been a surge in
investment, growth in exports and increased employment generation. Moreover,
experience has been gained in providing support to the private sector, and a closer
working relationship with the sector has been created. This is in part as a result of a
more open and liberalized economy, and due to the rebound from years of unsettled
domestic and external conditions.

The boom in the construction and faster growth of the industrial sectors are some of
the very well noticed developments in the country and these in turn have attracted
more and more investments.

The management of Tsehay Agro Industries, cognizant of the growing demand in

the agri-business in the near future, has envisages the establishment of a plant for
the production of wheat flour with a capacity of 24,000 tons per annum (300 days
are assumed for production) for the first one year (80 tons of wheat is assumed to be
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milled per day). Then the plant will have its expansion phase to Biscuit plant and
Infant food lines by the year 2017. Moreover the project will have 20 tons per day Oil
Mill which will refine 5 tons of oil per day. Generally the project will use Agricultural
raw materials as an input and produces different food products.

The decision by the promoter of the project is timely. But this decision must be
backed with a feasibility study. In view of the above, the promoter of the project has
commissioned SENYO Business PLC to evaluate the feasibility of establishing
Wheat Flour Mill, Infant Food and Oil Mill.

As the name indicates, the project is deals with agricultural inputs to produce food
and related items. The project is being considered for the sustainable supply of local
and export market. At the moment, there are few manufacturers engaged in the
production of these items. Thus, Tsehay Agro Industries will be among few
significant agro-processors in the country.

The rest of the report is organized as follows. The local demand of wheat flour is
analyzed first. This is followed by a technical analysis of the project. The
organizational structure and manning plan of the proposed project and the
implementation schedule of the project are presented in the subsequent sections.
The report closes by a financial analysis of the project.

4
 CHAPTER TWO – MARKET STUDY

2.1 PRODUCT DESCRIPTION

Wheat Flour: is the product mainly obtained by grinding wheat kernels or “berries.”
The kernel consists of three distinct parts: bran (14.5% of kernel weight), the outer
covering of the grain; germ (2.5% of kernel weight), the embryo contained inside the
kernel; and endosperm (83% of kernel weight), the part of the kernel that makes
white flour. During milling, the three parts are separated and recombined accordingly
to achieve different types of flours. The major types of flour include White flour,
Bread Flour, All-purpose flour, Cake flour and Semolina etc.

However, keeping in view the market demand and characteristics “Bread flour” is
recommended to be the final product of the proposed feasibility. Bread Flour is white
flour, milled from hard wheat or a blend of hard and soft wheat. It gives the best
results for yeast breads, quick breads and home baking breads. Bread flour is
usually enriched having protein varies from 8 to 11%.

Infant Food: is prepared from flour of milled wheat and soybean extrudate, vitamins
(A, B1, B2, B6, B12, C, D, Nicotinic Acid, Folic Acid), Minerals (Iron, Iodine and
calcium), iodized salt and sugar. It can be used at all times to families, to the public,
drought victims and to vulnerable people.

TABLE 2.1: COMPOSITION OF INFANT FOOD

S.N Ingredients Amount per 100 kg % Composition

1 Wheat flour 74 kg 74.0%
2 Soybean flour 20 kg 20.0%
3 Vitamin premix 200g 0.2%
4 Mineral premix 300g 0.3%
5 Iodized salt 500g 0.5%
6 Sugar 5kg 5.0%
TOTAL 100kg 100.0%

Edible oil: is substance derived from plants that are composed of triglycerides.
Normally, at room temperature oil is liquid. Edible oil is food cooking ingredient and
principally used for human consumption. The oil is extracted from a variety of fruits,
seeds, and nuts.

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Oils containing unsaturated fatty glycosides are by partial hydrogenation rendered
into fats of more suitable composition for edible purposes. This removal of double
bond results in improving quality, taste and odor of the oils as well as raises their
melting point. The oils commonly used are ground nut, soybean, cotton seed etc. in
mixture depending on the availability. The cake contains crude protein and is highly
appropriate for animal feed.

2.2 DEMAND ANALYSIS

2.2.1 SUPPLY TREND
2.2.1.1 Local Production
The country’s requirement of wheat flour is met through both local production and
imports. Accordingly, the data obtained from CSA on local production is given in
Table 2.2.
TABLE 2.2: DOMESTIC PRODUCTION OF WHEAT FLOUR (tons)

Year Quantity Growth rate (%)

2004 155,692.00 -
2005 148,786.00 -4.44%
2006 173,787.00 16.80%
2007 140,128.00 -19.37%
2008 152,103.00 8.55%
2009 261,409.00 71.86%
2010 314,053.00 20.14%
2011 351,148.00 11.81%
2012 372,158.00 5.98%
2013 403,691.00 8.47%
Average 247,295.50 13.31%
Source: “Report on large and medium scale manufacturing and electricity industries survey” CSA

A glance at Table 2.2 easily reveals that during the period 2004 – 2013, local
production of wheat flour, except for a slight decline in year 2007 is characterized by a
consistent growth. The growth registered during the last five years is especially
remarkable, so much so that local production of wheat flour has reached a record
figure of 403,691 tons in 2013. During the period of analyses local production of wheat
flour has registered an average annual growth rate of 13.31% (see Figure 2.1).

6
 FIGURE 2.1: DOMESTIC PRODUCTION OF WHEAT FLOUR

450,000.00
400,000.00
350,000.00
300,000.00
250,000.00
Tons

200,000.00
150,000.00
100,000.00
50,000.00
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

2.2.1.2 Import

Apart from domestic production, wheat flour are imported to the county. Table 2.3
shows wheat flour imported to the country during 2004-2013.

It can be observed that import of wheat flour is not characterized by a trend. Instead
the data is characterized by significant import in one-year and decline for 2 to 3
consecutive years. For instance import of wheat flour in 2005 was 16,750 tons and
consistently declined till year 2008 and reached 6,061tons. Again a significant
increase in imports was registered during 2009, which was 99,967 tons. However
import has declined by year 2010, the imported quantity in the year 2010 has
declined to 6,897 tons but again increased to 45,610 tons by the year 2011 which
again declined to 23,802 tons in year 2012. Despite the above situation the yearly
average import of wheat flour is about 21,973 tons.

TABLE 2.3: WHEAT FLOUR imported (tons)

Year Quantity Growth rate (%)

2004 824.87 -
2005 16,750.48 1930.68%
2006 1,308.03 -92.19%
2007 955.84 -26.93%
2008 6,061.50 534.15%
2009 99,967.61 1549.22%
2010 6,897.60 -93.10%
2011 45,610.72 561.25%
2012 23,802.88 -47.81%
2013 17,555.57 -26.25%
Average 21,973.51 476.56%
Source: Ethiopian Revenue and Custom Authority (ERCA)

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 FIGURE 2.2: IMPORT OF WHEAT FLOUR

120,000.00
100,000.00
80,000.00
Tons

60,000.00
40,000.00
20,000.00
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

2.2.1.3 Total Supply (Apparent Consumption)

Table 2.4 summarizes the structure of supply and apparent consumption of wheat
flour and the share of local production and import during the period 2004 - 2013.

TABLE 2.4: APPARENT CONSUMPTION OF wheat flour (in tons)

Import Local Total Growth
Year
Quantity % Share Quantity % Share Supply Rate
2004 155,692.00 99.47 824.87 0.53 156,516.87
2005 148,786.00 89.88 16,750.48 10.12 165,536.48 5.76%
2006 173,787.00 99.25 1,308.03 0.75 175,095.03 5.77%
2007 140,128.00 99.32 955.84 0.68 141,083.84 -19.42%
2008 152,103.00 96.17 6,061.50 3.83 158,164.50 12.11%
2009 261,409.00 72.34 99,967.61 27.66 361,376.61 128.48%
2010 314,053.00 97.85 6,897.60 2.15 320,950.60 -11.19%
2011 351,148.00 88.50 45,610.72 11.50 396,758.72 23.62%
2012 372,158.00 93.99 23,802.88 6.01 395,960.88 -0.20%
2013 403,691.00 95.83 17,555.57 4.17 421,246.57 6.39%
Average 247,295.50 93.26 21,973.51 6.74 269,269.01 16.81%

During the period 2004 – 2013, the maximum total supply (apparent consumption) of
wheat flour to the local market was 421,246 tons (year 2013), while the minimum
141,083 tons was registered in year 2007. In the remaining years, apparent
consumption was fluctuating between these two extremes, around a mean figure of
269,269 tons.

During the period under consideration (2004 – 2013) apparent consumption of wheat
flour though characterized by a noticeable growth trend exhibits fluctuations from year
to year. In 2005, total supply has increased by about 5.76% as compared to 2004.
However, in 2007 total supply has decreased by 19.42% while in 2009 supply has

8
increased by 128.48% compared to the previous year. Nevertheless, in 2010, supply
has declined by 11.19% (see Figure 2.3).

FIGURE 2.3: TOTAL SUPPLY OF WHEAT FLOUR

500,000.00
y = 35434x + 74380
400,000.00
300,000.00
200,000.00
Tons

100,000.00
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

During the same period (2004 – 2013), the maximum market share local production
managed to capture was 99.47% in 2004 and the minimum was 72.34% in 2009. On
average during the period under consideration, the overwhelming share (93.26%)
was accounted by local production.

2.2.2 PRESENT AND PROJECTED DEMAND

There are two main approaches for estimating the demand for a product. Either the
estimate of future value is based on an analysis of factors which are believed to
influence future values, the explanatory or end - use method, or else the prediction is
based on the behavior of historical supply data and trend over time - the
extrapolation method.

The end use method is computed based calculated consumption coefficient which is
usually obtained from sample survey. On the other hand the extrapolation method
does not take into consideration the underlining factors that affect the demand for a
product. Instead, in order to infer about its future behavior and trends, past behaviors
and trends on time series supply data are scrutinized employing various approaches.
The particular method used to produce a forecast may involve the use of
deterministic models such as smoothing and linear extrapolation or the use of a
complex stochastic model for adaptive forecasting.

For a product such as wheat flour it is very difficult for an end user to determine the
exact quantity of the product consumed in a given period since consumption is
determined by various factors. Moreover, even if the consumption coefficient is

9
determined through a sample survey it is difficult to compute the total demand since
wheat flour has its own unique segment of consumers. The size of the segment in a
given territory is determined by the age structure, gender composition and income of
the consumer and since there is no available actual data this can only be done
based on ambiguous assumption such as the potential consumers of wheat flour are
urban population of medium and high income groups.

However, most probably there will be an exception in the non-consumers and

consumers category leading to an over or under estimation.

On the other hand demand is defined as the quantity of a good or service consumers
are willing and able to buy at a given price in a given time period. Only when the
consumers' desire to buy something is backed up by willingness and an ability to pay
for it than we speak of demand. To emphasize this point the term effective demand
is used.

Therefore, using total supply as a proxy for effective demand will avoid the potential
errors associated with the end use method since it is based on actual supply data or
apparent consumption of the product.

2.2.2.1 Factors that affect the demand for the products under consideration

Knowledge of the determinants of market demand for a product, and the nature of
the relationship between demand and its determinants, is very helpful in analyzing
and estimating demand for a product. Accordingly the variables that are essential in
determining the magnitude and trend of the demand for wheat flour are:

 The overall economic development level and growth trend of the country,

 The performance of the manufacturing sector,

 The pattern and growth in investment, and

 Size of population and its growth rate.

In order to shed light on the likely direction of the demand for wheat flour the above
factors are briefly discussed.

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a) Performance of the Ethiopian Economy

The demand for wheat flour is strongly related to Economic development. Therefore,
the demands for wheat flour may also be expected to increase as economic
expansion accentuates the demand for the product.

In Ethiopia as a result of the appropriate policy adopted by the government in recent

years the country’s economy is on a higher growth trajectory. According to the
National Bank of Ethiopia the GDP of the country has registered an average annual
growth rate of 10.9 % in the past decade (2004 – 2013) which places Ethiopia
among the top performing economies in Sub-Saharan Africa.

The structure of the Ethiopian economy is divided into three major sectors; namely,
the agriculture, industry and service sectors. The service sector was relatively the
dominant economy in Ethiopia. The sector consisting of trade, transport and
communications, banking, insurance and real state, public administration and
defense, education, health and domestic and other personal services. The share of
service sector was about 45 % of the overall economy representing a principal
contribution of about 46.1% to the GDP growth in 2013 with 9.9% of its sectoral
growth. The widespread service work during the period was whole sale and retail
trade; constituting 15.7% of the whole economy followed by real estates, renting and
business activities comprising 8.5%.

The least contributor to GDP is the industrial sector, comprising mining and quarrying,
manufacturing, electricity and water, and construction. The sector had contributed
23.6% to the overall economic growth. Manufacturing contributed about 21% to
industrial output growth and 4.6% to real GDP growth during the period. The
construction sector of the industry contributed 15% to GDP growth and 68% to industrial
sector growth; implying that currently it is currently the leading sub components in the
industry due to expansion in the construction of roads, dams and housing
infrastructures. Manufacturing output grew by 10.8% in 2013.

The agriculture is second to service in terms of its size of contribution to GDP. The
share of agriculture to Ethiopian economy during the year 2013 was 42.7%. The sector
contributed 31.2% to GDP growth rate and grew by 7.1% in comparison with the 4.9%
growth recorded in the preceding year. This was due to a high increase in crop

11
production which improved from 5% to 8.2% as compared to previous year performance
and contributing about 26% to GDP growth and 80% to agriculture growth.

The positive performance of the Ethiopian economy is expected to continue in the

future. According to the government’s “Growth and Transformation Plan” during the
period 2010 – 2015 the GDP of the country is expected to grow at an average annual
growth rate of 13%. As a result, demand for wheat flour may also be reasonably
expected to increase as economic expansion continues.

b) Performance of the manufacturing sector

According to data obtained from CSA, the number of large and medium scale
manufacturing establishments increased from 1,074 in year 2004 to 2,107 in year 2013,
registering an annual average growth rate of 8% in terms of number. During the same
period, gross value of production and value added of the sector at market price have
increased from Birr 7.27 billion to 9.82 billion and Birr 3.39 billion to 4.87 billion,
respectively. In the years under consideration, gross value of production and value-
added of the sub-sector has shown a substantial growth, registering an average annual
growth rate of 3.65 % and 4.35 %, respectively. The gross value of production and the
value added of the manufacturing sector are given in Table 2.5.

TABLE 2.5: gross value of production and added value of medium and large scale manufacturing industry
Total Number of Value of Production Value-Added
Year Number
Persons Employed (000’ Birr) (000’ Birr)
2004 1,074 94,412 7,272,328 3,392,445
2005 1,207 95,708 8,129,056 3,830,422
2006 1,244 94,310 8,423,332 3,962,384
2007 1,443 98,986 8,091,737 3,948,321
2008 1,930 102,202 8,996,092 4,460,960
2009 1,969 104,246 9,176,014 4,550,179
2010 2,010 106,435 9,368,710 4,645,733
2011 2,076 109,948 9,677,878 4,799,042
2012 2,107 111,597 9,823,046 4,871,028
Source: “Report on large and medium scale manufacturing and electricity industries Survey” CSA.

Moreover, the Ethiopian government “Growth and Transformation Plan” 2010 – 2015
envisages the transformation of the country’s economy from agricultural economy to
industrial by the end of the plan period. To achieve this it is expected that the
industrial sector will register an average annual growth rate of 18.7% during the period
2010 – 2015. Moreover, as a result of the rapid growth of the sector the share of the
industrial sector from the total GDP of the country is expected to increase from 13% in
2010 to 19.1% in 2015. Accordingly the positive performance of the manufacturing
12
sector will increase the income of the persons employed in the manufacturing industry
which in turn will create a sizeable market for wheat flour.

c) Investment Activity

During 1993 – 2013 at national level a total of 69,079 investment projects involving
Birr 1.3 trillion capitals were licensed by the Ethiopian Investment Agency and
Regional Investment Offices (See Table 2.6). Of the total licensed projects, 58,735
(or 85 %) were domestic, 10,220 (or 14 %) foreign, and 124 (or 1 %) public. In terms
of investment capital, Birr 518.2 billion (or 39.6 %) were domestic, Birr 515.6 billion
(or 39.5 %) foreign and Birr 302.9 billion (or 30.5 %) were public.

TABLE 2.6: number and investment capital of total approved projects (capital in million birr)
Year Number Capital
1993 545 3,983
1994 526 3,421
1995 693 5,338
1996 908 6,490
1997 795 6,722
1998 898 9,939
1999 713 10,060
2000 624 14,127
2001 687 8,856
2002 801 9,190
2003 1,217 13,437
2004 2,225 21,220
2005 2,872 36,464
2006 5,859 80,036
2007 6,472 93,579
2008 8,961 170,378
2009 8,807 239,524
2010 6,496 96,415
2011 6,322 249,469
2012 5,649 146,168
2013 7,011 112,072
Average 3,289 63,661
Cumulative 69,079 1,336,890
Source: Annual Report by the National Bank of Ethiopia.

During the period of analyses, the number and investment capital of approved
projects has registered an average annual growth rate of 18.8% and 36.5%,
respectively.

As a result of the various incentives provided by the government, the high growth
rate of investment activity witnessed in Ethiopia during the past few years is
expected to continue in the future.

13
Due to the high growth rate of investment activity, the income of the population may
also be reasonably expected to increase which in turn will increase the demand for
the products.

d) Population Growth and Urbanization

 Population Growth

According to the first national population and housing census, the population as of
1984 Ethiopia was estimated to be 39,868,572. During the second national
population and housing census (1994) the total population was estimated at
53,477,265 which is a 34% increase compared to 1984. During the third national
population and housing census (2007) the population size is estimated at 73,918,505
which is a 38% increase compared to the population size of 1994.

The recent census has also revealed that 83.9 % of the population resides in the
rural areas, while 16.1 % were urban dwellers. The country is among the high fertility
nations with a total fertility rate of 6.9 children per woman. Over 45 % of the
populations are below age 15, indicating that there is a large potential of women in
the child bearing age. Because of this potential population momentum, whatever
intervention measures are to be taken to reduce fertility, the growth of the population
will show a fast increase for some to come. In fact, assuming the growth rate will
decline from the current 2.9 % per annum to below 2.0 % by the year 2030, the
Central Statistical Agency of Ethiopia projected the country's population to be over
106 million by the year 2020 and nearly 130 million by the year 2030. The World
Bank projected the country's population to be over 122 million by the year 2020 and
over 158 million by the year 2030. This implies that the population will double in less
than a quarter of a century and may triple well before year 2050.

 Urbanization

Urbanization is a development phenomenon that comes about with the development

of a country's economy in general and industrialization in particular. The rate of
urbanization is directly related to the demand for houses. It is expected that as a
country becomes more urban, more houses will be needed to accommodate the
increasing population in urban centers. In 1984 the urban population of Ethiopia
contributed only 11.2 % to the total population of the country (CSA, 1984). Over the
ten years between the two censuses, the proportion grew to 13.7 % (CSA, 1999) and
14
during the recent census (2007) the urban populations have further grown to 16.1%.

Because of the backwardness of the agricultural practice and diminishing return of

productivity of the arable land, population in the rural areas are on the verge of being
pushed out of their rural niche. This and the above mentioned factors will trigger
faster urbanization in Ethiopia as in any developing country.

Accordingly, the rapid growth of population in general and urbanization in particular

will create a huge market potential for wheat flour.

2.2.2.2 Demand Projection

From what was discussed in the preceding section, it can be conclude that the
demand for wheat flour will grow in the future and it is directly or indirectly influenced
by factors such as population growth, urbanization, income and the growth of the
country’s economy as a whole. The size of the present and future demand for the
product is thus, depends on the direction of movement of these factors over time and
the extent of their influence in demand.

Therefore, in order to estimate the present and future demand for the products, the
sensitivity of demand to the various factors that directly or indirectly affect the
demand should be examined and then select the most likely estimation.

Accordingly, the size of the future demand for the products is estimated using
different projection techniques that implicitly or explicitly show the above major
variables, which have a strong influence on the size of demand. Accordingly, the
following four projection techniques are employed;

 Time trend extrapolation,

 Regression method,
 Exponential Smoothing, and
 Consumption level method

a) Time Trend Extrapolation

The trend extrapolation method relies on historical apparent consumption data to

analyze and discern the past demand pattern to forecast for future it involves the
15
determination of a trend and the identification of its parameters. The past
consumption level is described in different forms of trend curves. It can be
represented by linear or exponential trends. Accordingly, the apparent consumption
trend of wheat flour has been found to be curve linear and can be represented by the
equation;

Y = a + bt, where Y is the apparent consumption being forecasted,

t the time period, and
a and b constants to be determined.

Accordingly, using the historical apparent consumption of wheat flour the two
constants are determined and the following trend equation is developed.

Y = 74,380 + 35,434t
The calculated correlation coefficient, which is a measure of association between the
two variables, shows that time and apparent consumption of wheat flour are
positively related; suggesting apparent consumption will continue to increase over
time. Accordingly, the projected demand for wheat flour using the above equation is
given in Table 2.7.

TABLE 2.7: projected demand for wheat flour based on trend extrapolation (tons)
Year Projected Demand
2014 464,154
2015 499,588
2016 535,022
2017 570,456
2018 605,890
2019 641,324
2020 676,758
2021 712,192
2022 747,626
2023 783,060
2024 818,494
2025 853,928
2026 889,362
2027 924,796
2028 960,230

b) Regression Method

16
The regression method employs the cause-effect relationship between a product
demand and the factors affecting it. It is expressed like the trend extrapolation
method either in the form of linear or curve linear regression equation.

Among the factors that have effect on the demand for wheat flour income and
population growth are identified to have the most profound effect. Therefore, these
variables are used to forecast the future demand for the products.

One of the indicators that measure the economic performance of a country and the
wellbeing of the population is GDP. Thus, it is assumed that GDP indicates the level
of income. Moreover, the urban population is the predominant wheat flour user,
therefore in estimating the demand for the product only urban population is
considered. Accordingly, the data used to develop the regression equation are
presented in Table 2.8.

TABLE 2.8: urban population, gdp and apparent consumption of wheat flour
Urban Population GDP Apparent
Year
( in 000) (in 000 Birr) Consumption
2004 10,189 81,421,066 156,516.87
2005 10,618 91,044,094 165,536.48
2006 11,056 100,908,384 175,095.03
2007 11,502 112,149,363 141,083.84
2008 11,956 124,826,996 158,164.50
2009 12,462 135,570,276 361,376.61
2010 12,978 152,585,083 320,950.60
2011 13,505 165,993,488 396,758.72
2012 14,599 179,198,610 395,960.88
2013 15,263 198,168,659 421,246.57
Average 12,413 134,186,602 269,269.01

The regression analysis has revealed that both GDP and size of urban population
have strong positive relationship with apparent consumption of wheat flours.
Accordingly, the relationship of the above variables has been found to be linear in
both cases and is expressed by the following equations,

Y = - 100,119.85 + 0.00275280 x, based on GDP and,

Y = - 518,155.96 + 63.437 x, based on urban population

Using these expirations and assuming that over the forecasting period GDP will
continue to grow at an equivalent rate of the average growth rate registered during
the period 2004 - 2013, which was 11.76% and using CSA’s estimation of urban
population size, the projected demand for wheat flours has been worked out and
presented in Table 2.9.
17
TABLE 2.9: forecast of wheat flours based on regression method
Projected Projected Demand (based
Year
Demand (based on GDP) on Urban population)
2014 509,564 499,040
2015 581,277 550,479
2016 661,425 604,521
2017 751,000 661,295
2018 851,111 720,940
2019 962,997 783,602
2020 1,088,044 849,432
2021 1,227,799 918,591
2022 1,383,992 991,248
2023 1,558,558 1,067,579
2024 1,753,656 1,147,770
2025 1,971,702 1,232,016
2026 2,215,395 1,320,523
2027 2,487,752 1,413,506
2028 2,792,145 1,511,190

c) Forecast Based On Exponential Smoothing

As indicated earlier apparent consumption of wheat flour shows an erratic pattern,

increasing at one time and decreasing at another time. Therefore, in order to
estimate the present and future demand for the products an appropriate statistical
method (i.e. Holt’s two parameter exponential smoothing method) is employed. (See
Table 2.10)

The Exponential Smoothing Model is given by: -

Yt+1 = Lt + kTt,

Lt = α * Yt+ (1- α) (Lt-1 + Tt-1),

Tt = β (Lt- Lt-1) + (1-β) Tt-1

Where:

Yt+1 stand for forecasted value,

Lt indicates the long-term level or base value for the time-series data, i.e. the level
term,

Tt indicates the expected increase or decrease per year, i.e., the trend term,

K stands for the number of time periods we want to forecast,

t represents time,

α and β are smoothing parameters.

TABLE 2.10: EXPONENTIALLY SMOOTHED FORECAST WHEAT FLOURS

α= 0.4
18
 β= 0.3
Year Apparent Consumption Trend Term Level Term Forecast
2004 156,516.87 18,782 62,607 -
2005 165,536.48 28,880 115,048 81,389
2006 175,095.03 32,620 156,395 143,928
2007 141,083.84 26,868 169,842 189,014
2008 158,164.50 22,243 181,292 196,710
2009 361,376.61 41,184 266,671 203,535
2010 320,950.60 42,755 313,093 307,855
2011 396,758.72 47,664 372,213 355,848
2012 395,960.88 44,794 410,311 419,877
2013 421,246.57 40,731 441,562 455,105

Accordingly based on the smoothed data the equation, Y = 30,846 + 46,125 t is

developed. Accordingly, by employing this equation the estimated wheat flours
demand is given in Table 2.11.

TABLE 2.11: present and projected demand for wheat flours based on exponential smothing method

Projected Demand
Year
(in Tons)
2014 538,221
2015 584,346
2016 630,471
2017 676,596
2018 722,721
2019 768,846
2020 814,971
2021 861,096
2022 907,221
2023 953,346
2024 999,471
2025 1,045,596
2026 1,091,721
2027 1,137,846
2028 1,183,971

d) Consumption Level Method

The consumption level method considers the level of consumption, using either
standard or estimated coefficients. This study considers per capita consumption to
apply the method.

Assuming that there was no suppressed demand during the period of analysis and
based of the historical apparent consumption of wheat flours the per capita
consumption of the particular year is established by dividing the apparent
consumption of that year by the corresponding size of population. Details are shown
in Table 2.12.

19
TABLE 2.12: Historical trends of apparent consumption of wheat flours, population size and rer capita
consumption

Apparent Total Population Per Capita

Year
Consumption (Tones) Size ('000) Consumption (KG)
2004 156,516.87 72,522 2.1582
2005 165,536.48 74,261 2.2291
2006 175,095.03 75,988 2.3043
2007 141,083.84 77,713 1.8155
2008 158,164.50 79,441 1.9910
2009 361,376.61 81,185 4.4513
2010 320,950.60 82,949 3.8693
2011 396,758.72 84,214 4.7113
2012 395,960.88 85,498 4.6312
2013 421,246.57 86,802 4.8530
Average 269,269.01 80,057 4.7318

A close look at the computed per capita consumption revealed that the data is
characterized by fluctuations. It was, therefore, felt necessary to make adjustments
and this was done by computing the simple average (arithmetic mean) of the last
three years. Thus the per capita consumption of wheat flours, as of 2013, which is
determined after making the necessary adjustments, is 4.73 Kg per year.

Wheat flours consumption is closely tied to income levels. As national incomes rise,
urbanization progresses and modern culture develop, so too does wheat flours
consumption. Accordingly, even though Ethiopian economy has registered a higher
growth rate in the near past, in order to be conservative the per capita consumption
of wheat flours is assumed to grow by a rate of 5% annually. Accordingly, the
estimated per capita consumption, population projection and the corresponding
projection for wheat flours is given in Table 2.13.

TABLE 2.13: demand projection for wheat flours based on consumption level method

Projected Total Per Capita Projected Demand

Year
Population Size (000) Consumption (in Tons)
2014 88,553 4.7318 419,020

20
 Projected Total Per Capita Projected Demand
Year
Population Size (000) Consumption (in Tons)
2015 90,340 4.9684 448,849
2016 92,163 5.2168 480,801
2017 94,023 5.4777 515,028
2018 95,920 5.7516 551,691
2019 97,855 6.0392 590,964
2020 99,830 6.3411 633,033
2021 101,844 6.6582 678,097
2022 103,899 6.9911 726,368
2023 105,996 7.3406 778,076
2024 108,135 7.7077 833,465
2025 110,317 8.0930 892,796
2026 112,542 8.4977 956,352
2027 114,813 8.9226 1,024,431
2028 117,130 9.3687 1,097,357

e) Evaluation of Alternative Forecasting Methods

Different forecasts have been established using different techniques. Each forecast
is based on certain valid assumptions about past trends and developments in the
future. A summary of the forecasts is presented in Table 2.14.

TABLE 2.14: summary of the alternative forcasting methods (in tons)

Projection based
Projection Projection based
Projection on regression method
Based on on Exponential
Year Based on Trend Based on
Consumption smoothing Based on
Extrapolation urban
Level Method method GDP
population
2014 464,154 419,020 538,221 509,564 499,040
2015 499,588 448,849 584,346 581,277 550,479
2016 535,022 480,801 630,471 661,425 604,521
2017 570,456 515,028 676,596 751,000 661,295
2018 605,890 551,691 722,721 851,111 720,940
2019 641,324 590,964 768,846 962,997 783,602
2020 676,758 633,033 814,971 1,088,044 849,432
2021 712,192 678,097 861,096 1,227,799 918,591
2022 747,626 726,368 907,221 1,383,992 991,248
2023 783,060 778,076 953,346 1,558,558 1,067,579
2024 818,494 833,465 999,471 1,753,656 1,147,770
2025 853,928 892,796 1,045,596 1,971,702 1,232,016
2026 889,362 956,352 1,091,721 2,215,395 1,320,523
2027 924,796 1,024,431 1,137,846 2,487,752 1,413,506
2028 960,230 1,097,357 1,183,971 2,792,145 1,511,190

As can be seen from the above Table, the projection obtained through regression
based on GDP resulted with the highest estimate while until year 2023 the projection
based on consumption level is the lowest forecast. However, after year 2024 trend
extrapolation is the lowest forecast.

21
Each forecast is based on valid assumptions about market trends and development
in the future however; each has its own drawbacks and merits.

The projection based on consumption level method is based on past per capita
consumption and assuming that the per capita consumption will increase through
time. However, even though this might seem a valid assumption it is difficult to work
out the growth rate of per capita consumption. For instance, if one of the influencing
factors that determine per capita consumption is price and it is reduced substantially,
then per capita consumption will increase drastically.

On the other hand, the estimates obtained using the regression model is based on
forecasts of the independent variable (projected urban population and GDP), and the
errors from the forecasts of the independent variables could have a cumulative effect
on the errors of the regression model itself, which is considered as a major
drawback.

Thus, the drawbacks of each alternative method impose a need to combine different
methods in order to arrive at the best possible results. Combining forecasts provide a
way to compensate for deficiencies in each method, as averaging the forecasts
obtained by the different methods can contribute to the improvement of the
forecasting accuracy, and the shortcomings of one technique can be offset by the
advantages of another. In fact, this kind of approach is considered as better method
as it takes into account the quantitative aspect and the qualitative judgments on the
future changes. Furthermore, this method averages both extremes of over
exaggeration and under estimation.

The combined estimates of the future demand for the products under consideration
is computed by assigning 30% weights each to the regression methods based on
urban population and GDP, 20% to trend extrapolation method and 10% each to
consumption level and exponential smoothing methods. The regression method is
assigned more weights in the combined forecasting as it is based on urban
population and income which are one of the decisive factors that influence the
demand direction of the products under consideration.

Accordingly, the demand for wheat flours is forecasted to grow from a present (2015)
size of 1,839 tones to 7,668 tones in 2028.

22
 TABLE 2.15: Combined projection (in tons)
Combined
Year
Projection
2014 491,136
2015 542,764
2016 597,915
2017 656,942
2018 720,234
2019 788,225
2020 861,395
2021 940,275
2022 1,025,456
2023 1,117,595
2024 1,217,420
2025 1,325,740
2026 1,443,455
2027 1,571,564
2028 1,711,179
2.3 MARKETING MIX ASSESSMENT

Marketing mix can be defined as the set of controllable, tactical marketing tools that
a company blends to produce the response it wants in the target market.

Marketing mix includes, but are not limited to the best possible mix of three
variables, namely; the nature of the product, the price of the product, the channels of
distribution that take the product to the consumer from the producer and the
promotional activities. A combination of these three elements, affects the ultimate
sales success of a product.

2.3.1 PRODUCT

Product quality is the basic and most important marketing mixes that affect the
success of a product. Product quality has two dimensions, i.e., level and
consistency. Level means the producer must first choose a quality level that will be
acceptable in the target market and in a level that comply with the quality of
competing products. Consistency refers to the consistent delivering of ones
established quality through strict quality control measures.

The envisaged project would thus install modern machineries and safe guarded
production process with a system of optimally combined machine operations and
control of them by qualified and trained technicians and quality control will be given
top priority.

23
2.3.2 DISTRIBUTION

1) General

Distribution refers to the distribution of the product to the consumers by the producer
while channel of distribution is the network of middlemen through whom the products
flows till it finally reaches to the hands of the actual users or consumers.

It becomes difficult for a manufacturer to adequately follow market trends and serve
target markets if a proper distribution channel and organizational set up are not in
place. Some markets are excessively supplied, while others experience frequent
shortages. These incidences can occur even if a manufacture employs a proper
media to channel its products to all market segments. Intermediaries often and
deliberately introduce artificial shortages in some brands to boost the marketability of
a weaker brand.

A distribution system for any tangible product comprises two principal elements.

 A physical distribution, or logistics, system that is concerned with the

transportation and storage of a product from the time production is
completed until the product is delivered to the consumer; and

 A set of organization relationships among the manufacturer and the

various intermediaries, or agents, who influence the product’s passage
through the physical distribution system.

Although the two elements make up a complete channel of distribution, the term will
be used in its narrower sense only, that is, to designate the manufacturer and the set
of existing intermediaries and to indicate the appropriate intermediaries.

Sales or distribution channels are the chain connecting producers and consumers.
This mediation function is usually performed by specialized enterprises, agencies or
representatives, using their own marketing instruments. In addition, these channels
are also lines of information between manufacturers and consumers.

Channel of distribution varies in its form and length from consumer goods to
industrial goods and within one class of goods; it varies from product to product. For
a consumer market a retailer is essential, whereas in the industrial market the
retailer can be eliminated. For a perishable commodity, the producer prefers few and

24
controlled levels of distribution, while for durable and standardized goods a longer
and diversified channel may be necessary. Size and average frequency of
customer’s orders also influence the channel decision.

The producer must also choose whether to employ intensive, selective or exclusive
distribution. For convenience goods, which are frequently purchased, have low unit
price and are bought by the consumer at the most accessible retail outlet, shortly
after a need for them is felt, the distribution strategy should be the unloading of the
product through every possible outlet with a view to achieving an extensive
distribution.

Shopping goods, which are purchased after a careful consideration and comparison
of quality, price and suitability and unlike convenience goods, have a high unit price,
are sold in few retail outlets, thus, selective distribution strategy may be profitable.

In the purchase of specialty goods, the consumer insight on a specific brand and do
usually have adequate product information and have already made up their minds to
go for a specific brand. For such products, exclusive distribution, where only certain
dealers distribute the product will be ideal.

2) Distribution Channel Options

The following are the main alternative distribution channels commonly used by
producers to reach the consumers.

 Direct sale to consumers

Manufacturer Consumer

 Indirect sale through the medium of a third party.

Manufacturer Wholesaler/Agent Retailer Consumer

Manufacturer Retailer Consumer

 A combination of both direct and indirect sale.

Direct sale offers the greatest degree of control, but can be uneconomic where there
are a large number of customers for the product in question. Under these
circumstances some form of intermediary may be able to operate at a lower cost by
25
combining the disparate, but complementary outputs of several manufacturers for
resale to small users of such products.

Distribution through an intermediary offers the manufacturer the opportunity to

improve his overall profitability, although at the sacrifice of some measure of control,
and so is frequently used to extend the coverage of the producer’s own sales force.

Distribution through wholesaler/agent has the following advantages.

 The wholesaler/agent reaches a majority of the small retail outlets,

 The transport problems of the manufacturer, invoicing and credit control are
comparatively simple,

 Relatively few salespersons are needed by the manufacturer.

Sales agents serve as a channel through which the producers can reach the
consumer. From the manufacturer’s viewpoint, the major advantage of employing
agents is that he only pays commission on actual sales and so avoids the fixed costs
associated with the maintenance of sales force. Further, agents enter into a
contractual agreement with their principal and so are subject to a greater degree of
control than is usually possible when selling through an independent wholesaler.

Most agents handle a line of complementary but non-competing products, and

operate within a clearly defined territory. The successful agent depends heavily
upon his established contacts, and so offers the manufacturer a ‘ready-made’
salesman when introducing a new product or extending his geographical coverage.

Although several distribution options are open to the consumer-goods manufacturer,

almost all eventually involve a retail outlet of some type or other.

In view of the high costs associated with direct sales to the consumer, most
consumer goods manufacturers prefer to sell through some form of independent
retail outlets. Given the number of retail outlets, direct sale might appear totally
uneconomical at first sight.

26
3) Proposed Channel of Distribution

Cost and control are the basic criteria for selecting distribution channel. That is,
which channel member can perform the necessary channel functions at the lowest
cost consistent with the required degree of efficiency?

When selecting a suitable channel of distribution a number of factors such as the

nature of the product, market trends and structure, competition, pricing polices,
consumer needs, financial limitations as well as need of the manufacturer or
producer have to be taken into consideration.

In the case of wheat flour, the following characteristics of the product and market
structure have been given due emphasis.

 The market is large but is widely scattered.

 The final consumers and retailers are numerous.

 Individual orders are small.

Moreover, another key issue in selection of distribution systems is the effort

consumer is willing to expend in searching activity to decide which brand he will buy
and at which outlet. This means the choice of a distribution system depends on
product type to be marketed, demand diversity and marketing objectives and
organizational capacity of the manufacturer.

The products of Tsehay Agro Industries are classified as convenient goods. These
are goods that consumers usually spend the least time searching for their favorite
brand. Instead consumers mostly purchase the available brand. As a general rule,
convenience goods are sold at numerous outlets and must be accessible in every
space available in the market in order to create maximum consumer convenience.
These types of products usually seek intensive distribution.

Intensive distribution of a product can be achieved through any one of the following
distribution systems:

 Through retailers to consumers - a one tier system.

 Through wholesaler to retailer to consumer - a two tier distribution

system.
27
  Through distributors to wholesalers to retailers to ultimate consumers - a
three tier distribution system.

A manufacturer of convenient goods for obvious reasons cannot efficiently and

effectively manage and implement a one tier distribution system with the objective of
catering the entire market and at the same time ensuring the maximum convenience
for the consumer. The system demands the company to open up numerous sales
outlets in all market segments in order to canvas and make the product available in
every space available in the market to reduce the search time for the consumer.
Thus it is difficult if not impossible for Tsehay Agro Industries to establish own retail
sales outlets in the entire market as the cost and human resource management
implications remain to be high and risky.

In a vast market like Ethiopia, where a host of several wholesalers and retailers are
operating, the most appropriate distribution system for convenient goods is a two-tier
or a three-tier distribution system. Under the first case a manufacturer is expected to
set up distribution arrangements with a selected number of wholesalers and does not
make direct arrangement with retailers. If the distribution arrangement is properly
organized to serve all market segments, the financial and human resources
requirement to run it would not be as huge as the first options. If markets are clearly
differentiated or segmented, only small number of wholesalers will be required to
distribute convenient goods intensively.

In the second case the Factory needs to deal only with few distributors that have
distribution networks in various parts of the country. The distributors shall take full
responsibility in establishing their own wholesale outlets in their market territory that
the factory would assign to them.

Thus Tsehay Agro Industries has either to practice a three-tier system or two-tier
system. In view of the conventional wisdom, that it is difficult to find a distributor
which has a high quality managerial ability, organizational network and adequate
financial resources in marketing a significant amount of the factory’s products the
three-tier system could not be applied.

The best solution is by appointing sufficient number of agent which are manageable
in size for supervision and control, feedback exchange purposes and facilitating the
selling process of the project and by assign to each agent a well-defined market
28
segments. However, it is recommended that Tsehay Agro Industries avoid selling its
products directly to consumers and only be engaged in wholesaling of its products.

Therefore, if the envisaged project adopted two-tier system the distribution channel
will be:

Tsehay Agro Agents Consumers

In this case the agents receipt the product from Tsehay Agro Industries at factory
gate with their own truck and then supply to consumers in their market segment.

2.3.3 PRICING

Pricing a product is an important and critical activity since it is the major factor in
determining revenue. If a lower price is fixed, it will affect the profitability of the
company, and if a higher price is fixed, the product will not be able to stand in market
competition and may be forced out of the market. Therefore, the right price has to be
fixed.

In general, price setting is done by selecting one of the two frequently used pricing
approaches. The simplest method is cost-based approach (Cost-plus pricing), which
involves adding a standard mark-up to the cost of the product, and competition
based approach (going-rate pricing), which bases its price largely on competitors’
prices.

At present, there are a number of local wheat flour producer, which means the
envisaged plant, has to work within a competitive environment. In a competitive
market, a straight cost plus pricing is not desirable as it is not sensitive to demand
and competitors’ price. Furthermore, the Ethiopian market is, by-and-large, price
conscious and consumption demand is very much sensitive to price.

Therefore, competition based or going rate pricing is unavoidable as charging for a

product more than the going rate would not attract consumers and would eventually
force the products out of the market. Consequently, the envisaged plant has to adopt
a going rate pricing strategy.

Under the going market price condition, it is evident that profits will depend very
largely on the project’s ability to minimize costs.

29
2.3.4 PROMOTION

Market promotion is an important part of the marketing mix , as it is required to

create and increase consumer awareness , knowledge and readiness to buy through
media communications (advertising) and through special offers to trade and / or
consumers (sales promotion).

However, it is important to realize that, on its own; market promotion will not replace
selling, change long-term trends, or build long-term customer loyalty. It has to be
supported by quality and distribution efficiency.

Local millers practiced advertisements through different Medias. The following are
the type of promotional efforts made by the millers (in order of importance).

 Sponsoring TV and radio entertainment programs;

 Calendars, Pamptonsets; and

 Poster advertisement.

Advertising is a potential tool of marketing and a component of overall promotion

activities. It serves as a communication link between the producer/seller and the
buyer or the consumer. It does not simply provide information about products but
also attempt to influence people by an overt appeal to reason or emotion. In other
words, advertisement does not end with the flow of information from seller to the
buyer; it goes further to influence and persuades people to action or belief.

An advertisement would be effective only if the target audience accepts the message
and is motivated to take the required action. Thus, the sequence of events and
advertisement should trigger is:-

 Attract attention,

 Rouse interest,

 Build desire,

 Obtain buying action,

 Build brand image, and

30
  Maintain brand loyalty.

Initially, the objective of advertisement should concentrate in attracting attention for

the product. Once product acceptance has been achieved, advertisement usually
concentrates on building brand image and loyalty.

However, in order to be successful and advertising campaign have to convey the

right information to the right people in the right way. Thus, message creation and
media selection should be considered carefully. While choosing the message or
content of an advertisement in view of the target audience culture, age, sex and life
style, the words, pictures, associations and images to be used should carefully be
selected .The advantages, benefits and uses of the product to be advertised should
be relative to the target audience.

Selection of the media channel involves choosing among available advertising media
and deciding how they can be used; given the type of message, target audience and
the budget available.

Currently, in Ethiopia various media channels are available for manufacturers such
as:

 Print media (Newspapers and Magazines),

 Outdoor media (Posters and Metal stands ),

 Specialty media (T-shirts, Buttons, Caps, Stickers, Badges and Bazars),

and

 Point-of- purchase or in-shop media (Banners, Hangings, Packaging and

Painted signs).

An advertiser can use one or a combination of the media channels available.

However, it should achieve an optimum combination of “coverage” and “frequency”
within a given budget. In other words, whichever channel or channels used the
advertisement should reach as many prospects as possible within the target group
(coverage),while at the same time each of the prospects should be reached by a
sufficiently large number of advertisements (frequency).

31
While promotional activities are essential for marketing a product, its effectiveness
depends on the type of media used. TV advertisement, calendar and pamptonsets,
Radio advertisement, and posters (in order of priority) are considered as effective
means of advertising.

For both TV and radio advertisements the envisaged project should use special
occasions such as public holidays and sponsor sport programs. In calendar
advertisement the project should focus not only on its attractiveness but also on its
fair distribution and wide coverage. Participation in exhibitions as well as preparing
special exhibitions and displays is very important for advertising the products.

Besides advertisement through different medias the project should give due attention
to the following promotional activities.

 Gifts of articles such as Skirts, Gown, T-shirts, and the like should be
sufficiently and fairly distributed to customers,

 Providing credit facility and facilitating product distribution by lending

 Launching invitation/entertainment programs, mainly in towns where

competition is higher,

 Providing bonus and commission to encourage sales force and agents,

32
 CHAPTER THREE – MATERIALS AND INPUTS

3.1 DIRECT RAW MATERIAL

Wheat has been used as primary source for making flour; however flour can also be
made from other starchy plant foods. These include barley, buckwheat, corn, lima
beans, oats, peanuts, potatoes, soybeans, rice, and rye. The envisaged project is
based on the assumption of wheat as raw material. There are basically six different
classes of wheat: Hard Red Winter, Hard Red Spring, Soft Red Winter, Hard White,
Soft White and Durum.

The end products are determined by the wheat’s characteristics, especially protein
and gluten content. The harder the wheat, the higher the protein content in the flour.
Soft or low protein wheat having 8 – 11 % protein are used in flour making ideal for
cakes, pastries, cookies, crackers and Oriental noodles. Hard flour containing 11 –
18 % proteins are made from high protein wheat, used in breads and quick breads.
Durum is used in pasta and egg noodles.

In addition, mixing of small amount of additives is also practiced globally. Bleaching

agents such as benzoyl peroxide are added to make the flour whiter. Oxidizing
agents (also known as improvers) such as potassium bromate, chlorine dioxide, and
azodicarbonamide are added to enhance the baking quality of the flour. These
agents are added in a few parts per million. Self-rising flour contains salt and a
leavening agent such as calcium phosphate. It is used to make baked goods without
the need to add yeast or baking powder. Beside this, some producers add vitamins
and minerals to replace those lost during milling. The most important of these are
iron and the B vitamins, especially thiamin, riboflavin, and niacin.

The principal raw materials of edible oil are groundnut, soy bean, and cotton seed.

3.2 AUXILIARY RAW MATERIALS

Auxiliary materials used for the production of wheat flour comprise packing materials
and sewing thread. PP bag 25kg is used for packing the wheat flour and infant food,
PP bag 40kg is used for packing the by-products bran and residual cakes of oil
seeds. The refined oil is packed in steel drums (200 lt).

33
3.3 UTILITIES

Utilities required for the production of wheat flour are water, electricity, and
compressed air.

Water is used for wheat conditioning, cleaning and for human consumption.
Electricity is used for running machineries and lighting purpose. Compressed air is
for operation of pneumatic instruments. The source of water and electricity is ground
water and national grid respectively.

3.4 MATERIAL AND INPUTS CONSUMPTIONS AND THEIR COSTS

The annual costs of materials and inputs are estimated using the recent unit costs
and total annual requirements calculated based on selected technology for the
project and international standard in the field. Annual requirement and cost of direct
raw and auxiliary material are given in Table 3.1. The total annual cost of raw
materials and inputs is estimated at Birr 418,622,000. Annual requirement and cost
of utilities i.e. electrical energy are 364,000kwh and Birr 240,450 respectively.

TABLE 3.1: ANNUAL RAW MATERIAL AND INPUT REQUIREMENT AT FULL CAPACITY
OPERATION AND THEIR COST

Unit Cost Total Cost (000 Birr)

No. Description UoM Quantity
(Birr) L.C FC Total
A. Direct Raw Materials
1 Wheat ton 24,000 6,000 144,000 - 144,000
2 Soybean ton 4,155 20,000 83,102 - 83,102
3 Vitamin, mineral and salt ton 36 50,000 - 1,800 1,800
4 Sugar ton 180 15,000 2,700 - 2,700
5 Oil seed ton 6,000 30,000 180,000 - 180,000
Sub Total 409,802 1,800 411,602
B. Auxiliary Material
1 Flour - 25kg PP Bag Pcs 869,184 5 4,345 -
2 Bran and cake - 40kg PP Bag '' 224,839 6 1,349 -
3 Infant - 25kg PE Lining Bag '' 144,000 4 576 -
4 Steel drum for oil '' 7,500 100 750 -
Sub Total 7,020 - 7,020
Grand Total 416,822 1,800 418,622

34
 CHAPTER FOUR – TECHNOLOGY AND ENGINEERING

4.1 PRODUCTION PROCESS

4.1.1 WHEAT FLOUR PRODUCTION PROCESS

Before receiving wheat, samples are tested to ensure wheat quality and safety and
to determine end-use qualities. These tests determine how the wheat will be stored
and processed. Millers often blend different qualities of wheat to achieve the desired
wheat flour quality.

Flour production is based on the mechanical extraction of the core part of the kernel,
the endosperm which contains the bulk portion of the kernel’s protein and
carbohydrates. Figure 4.1 shows the main steps involved in wheat milling.

The production process of flour is mainly subjected to machine/method used

particular to the desired output product. However a brief summary of the general
operations in any particular production line can be illustrated under the following
headings:

1) Cleaning and Storing

As wheat arrives in the mill it is passed through a cleaning process to remove coarse
impurities and is then stored according to its quality. This is mainly determined by the
hardness, protein content and gluten quality of the wheat.

Cleaning involves using magnetic separators (to remove iron particles), vibrating
separators (to remove straw and dirt), aspirators (to remove dust) and de-stoners (to
remove stones). Disc separators are used later in the process for separating the
various sizes of wheat kernels.

2) Washing and Sorting

Washing begins with screening to remove coarse, fine materials and the grain is
separated by size, shape and weight. The finished product is then passed into
conditioning bins.

3) Conditioning and tempering

35
Wheat conditioning and tempering (moisturizing) finalize wheat preparation for
milling. Moisture is added to toughen the bran and to facilitate easy separation of
kernel parts. Tempered wheat is stored for about 8–20 hours, depending on the type
of wheat, whether soft, medium or hard. Blending of different wheat types and
qualities can be done at this stage to achieve a specific flour quality.

4) Milling

The wheat is milled in roller mills. The modern mills use the process of gradual
reduction of the wheat kernels with the goal to obtain middlings (coarse particles of
endosperm). The middlings are then separated from the bran by sieves and returned
to the appropriate rollers until the desired flour is obtained. Proper adjustment and
settings of the rolls ensure maximum output of high-quality flour. Grinding that is too
hard will result in bran particles getting into the flour, while grinding that is too light
will result in the waste of endosperm.

From the rolls, the milled products are sent by pneumatic systems to rotating box-
type sifters. The sifters separate the larger particles from the smaller particles.
Larger particles are shaken off at the top, leaving the finer flour particles to sift to the
bottom. This process may be repeated several times.

5) Packaging and Dispatching

The final product is packaged in standards bags. Then it is forwarded for either
storage or transportation.

36
Figure 4.1: THE PROCESS OF MILLING WHEAT INTO FLOUR

Source: FAO, agribusiness handbook

37
4.1.2 INFANT FOODS PRODUCTION PROCESS

The raw materials wheat and soybean are cleaned by screening and aspiration
through their density difference and then the cleaned wheat and soybean is
subjected to milling as per the granulation specifications. The wheat flour, soybean
and water are proportionally and thoroughly mixed and then pneumatically
transported to the extruders.

The extrudate will be transported on the belt and screw conveyers consecutively to
the hammer mill. The milled mixed flour will be transported pneumatically and with
screw conveyor to the storage silo. Depending on the required product, the blend
flour, the vitamin, mineral, iodized salt and/or sugar will be weighed, dosed and
mixed for homogeneous mixing of macro and micronutrients. The final product will
be packed with polypropylene bag having inner liner.

4.1.3 OIL MILL PRODUCTION PROCESS

The seed requires a thorough cleaning process to remove sand, stalk, plant debris
and any foreign matters by rotary or table sieves, usually with air aspiration by fans,
and cyclones for dust removal from the air. Then, the seed have to be prepared for
efficient oil recovery. The stages involved in pre-treatment are:

a) Size reduction of the seeds by breaking them, usually in fluted roller mills;

b) Flaking of the seed particles in roller mills with smooth roller surfaces (0.2 -
0.3 mm);

c) Conditioning the seed by adjusting their moisture content and temperature,

while keeping the seed hot (say 90-950C) for periods that vary widely (30-60
minutes). Then, extraction by using high pressure screw press follows.

The crude oil obtained from the press requires undergoing refining processes to
produce a bland tasting, light coloured oil without odour or flavour. To obtain fully
refined oil from crude oil, the following steps are necessary: degumming,
neutralizing, bleaching,

Winterizing and deodorizing. The refined oil is, then, packed and marketed. The
refined oil containing unsaturated fatty glycerides are by partial hydrogenation
rendered into fats of more suitable composition for edible purposes. The

38
 hydrogenation process consist of the following two process steps; hydrogenation and
post hydrogenation refining stages (the refining process mentioned above)

4.2 MACHINERY

The detail of recommended machinery and equipment along with their costs is given
in the Table 4.1. The total cost of machinery and equipment for the envisaged project
is estimated at Birr 4.7 million.

TABLE 4.1: DETAILS OF MACHINERY AND EQUIPMENT REQUIREMENTS OF

THE PROJECT AND THEIR RESPECTIVE COSTS
Cost
Unit of
No. Item Description Qty Foreign Total Cost
Measure
Currency (USD) (Birr)
PHASE I: WHEAT FLOUR
1 80T Wheat flour milling machine 101,000.00 2,138,069.00
Bucket elevator Set 1
Low-pressure blower Set 1
High efficiency vibrating sieve Set 1
Horizontal wheat scourer Set 1
Bucket elevator Set 1
Gravity classifying destoner Set 1
Wheat washing destoner Set 1
Screw conveyor Set 1
Plane revolving sifter Set 1
Magnetic separator Set 1
Low-pressure blower Set 1
Roller mill Set 1
High-pressure blower Set 1
Multi-section plansifter Set 1
Purifier Set 1
Screw conveyor Set 1
Bran finisher Set 1
Vibrating rated feeder Set 1
Automatic packing machine Set 1
Sewing machine Set 1
Platform scale Set 1
2 Sea freight 4,000.00 84,676.00
Total FOB price 2,222,745.00
Insurance, bank charges, port handling, 222,274.50
inland transport and contingency (10%)
Total I 2,445,019.50
PHASE II: INFANT FOOD
1 Screw conveyor Set 1 990.00 20,957.31
2 LXSL-I Set 1 1,375.00 29,107.38
3 Blender Set 1 1,925.00 40,750.33
4 HLJ-350/C Set 1 1,540.00 32,600.26
5 Vacuum conveyor Set 1 1,925.00 40,750.33
6 ZKT-3 Set 1 15,000.00 317,535.00
7 Storage with plat form Set 1 495.00 10,478.66
8 CLC-I Set 1 10,000.00 211,690.00
9 Conditioner Set 1 990.00 20,957.31
10 TZQ-I-I Set 1 495.00 10,478.66
39
 Cost
Unit of
No. Item Description Qty Foreign Total Cost
Measure
Currency (USD) (Birr)
11 Twin Screw Extruder Set 1 8,250.00 174,644.25
12 SLG85-II Set 1 2,200.00 46,571.80
Sea freight 2,750.00 58,214.75
Total FOB price 1,014,736.02
Insurance, bank charges, port handling, 101,473.60
inland transport and contingency (10%)
Total II 1,116,209.62
PHASE III: OIL MILL
1 Lifting Set 3 3,000.00 63,507.00
2 Conveyor Set 1 1,500.00 31,753.50
3 Gyratory vibrating screen Set 1 2,000.00 42,338.00
4 Steam cooker Set 1 12,000.00 254,028.00
5 Oil press machine Set 2 6,500.00 137,598.50
6 Clarification tank Set 2 170.00 3,598.73
7 Oil sink Set 1 170.00 3,598.73
8 Oil tank Set 2 780.00 16,511.82
9 Oil pump Set 2 400.00 8,467.60
10 Filter Set 1 1,000.00 21,169.00
11 10t crude oil tank Set 1 2,600.00 55,039.40
12 Installation material Set 1 6,000.00 127,014.00
13 Warm keeping material Set 1 500.00 10,584.50
Sea freight 2,750.00 58,214.75
Total FOB price 833,423.53
Insurance, bank charges, port handling, 83,342.35
inland transport and contingency (10%)
Total III 916,765.88
Auxiliary Equipments 200,000.00
Grand Total 4,677,995.00
Note that as of September 6, 2015
1USD =21.1690 Birr

Auxiliary equipments which are necessary for the project are utility and material
handling equipments. The main auxiliary equipments are transformer, high tension
switchgear, diesel generator, compressor, forklift and trolley hydraulic jack.

4.3 BUILDINGS AND CIVIL WORKS REQUIREMENT AND THEIR COSTS

The envisaged plant requires building for milling and packing, ware houses, and
management buildings. The space requirement of the plant is determined by the total
area each production equipment occupy, adequate space required in between the
equipments /machineries, space required for the workers and that needed to handle
work in progress. Sufficient building space is also required for godowns, silos for
cereals, daily bins and conditioning bins. Finished product store will also have
enough building space to store enough finished products.

Site development and landscaping are one of the important functions of civil works
for the envisage plant. They include green space and trees; fencing; lighting

40
systems; and surface drainage systems. In the plant compound there exist
construction of asphalt road as part of infrastructural development to ease circulation
of raw materials, products, byproducts, and people.

The breakup of the required area and construction cost of the building is given in the
table below:

TABLE 4.2: SUMMARY OF BUILDING AND CIVIL WORKS REQUIREMENT

AND THEIR COSTS (BIRR )

Total area Rate/Sq. m Total Cost

S/N Description
(sq. m) (Birr) (Birr)
PHASE I
1 Plant
1.1 Milling area 200 2,000.00 400,000.00
1.2 Packing area with finished product store 300 2,000.00 600,000.00
1.3 Cereals silos 100 2,000.00 200,000.00
1.4 Daily bins 50 2,000.00 100,000.00
1.5 Conditioning bins 50 2,000.00 100,000.00
Sub Total 700 1,400,000.00
2 Management Building
2.1 G+1 office building including lab
- Area of ground floor 100 3,500.00 350,000.00
2.2 Power room 30 1,500.00 45,000.00
2.3 Guard room 15 3,500.00 52,500.00
Sub Total 574 447,500.00
Construction of water well - 200,000.00
Total Phase I 2,047,500.00
PHASE II
1 Plant
2 Management Building
2.1 G+1 office building including lab
- Area of 1st floor 100 3,500.00 350,000.00
2.2 Wash rooms 40 3,500.00 140,000.00
2.3 Cafeteria 40 3,500.00 140,000.00
Total Phase II 574 630,000.00
Total building and construction costs 2,677,500.00

4.3 VEHICLES

Three vehicles will be required for the envisaged project. One Isuzu trucks will be
acquired for providing transportation service for raw material and finished products.
One automobile and one pick-up will also be acquired for commercial and
administrative activities are required. The list of vehicles and their respective cost are
shown in the Table 4.3. The total cost of vehicles is estimated at Birr 1.6 million.

41
 TABLE 4.3: LIST OF VEHICLES AND THEIR COST

QTY Unit Price Total Price

No. Description
(Nos.) [Birr] [Birr]
PHASE I
1 Pick up 1 600,000 600,000
2 Automobile 1 350,000 350,000
Total Phase I 950,000
PHASE II
1 ISUZU Truck 1 650,000 650,000
Total Phase II 650,000
Grand Total 1,600,000

4.4 OFFICE FURNITURE AND EQUIPMENT

The envisaged factory requires office furniture and equipment such as chairs, tables,
shelf, computers etc. for employees. The total cost of office furniture and equipment
is estimated at Birr 265,500. For details see Table 4.3.

TABLE 4.3: LIST AND CORRESPONDING COST OF OFFICE FURNITURE

AND EQUIPMENT

Unit Price Total Amount

No Description Unit Qty
(Birr) (Birr)
1 Executive Table with Computer Table Pcs 4 12,000 48,000
2 Executive Chair " 4 6,000 24,000
3 Secretary Table " 1 3,500 3,500
4 Secretary Chair " 1 2,000 2,000
5 Guest Chair Pcs 6 1,000 6,000
6 Table with drawers " 8 3,000 24,000
7 Normal Chair " 8 1,500 12,000
8 Filing Cabinet " 5 5,000 25,000
9 Casher's Safe " 1 10,000 10,000
10 Computer " 10 9,000 90,000
11 Printer " 4 4,000 16,000
12 Fax " 1 5,000 5,000
Total 265,500

42
 CHAPTER FIVE – LOCATION AND SITE

5.1 LOCATION AND SITE

The proposed project site is located in the Regional State of Amhara within the Bahir
Dar city. The selection of project area is made with due consideration of the
availability of electricity, telephone and water as well as proximity to raw materials
and It is near to the major customers.

Bahir Dar is located approximately 578 km north-northwest of Addis Ababa, having a

latitude and longitude of 11°36′N 37°23′ECoordinates: 11°36′N 37°23′E and an
elevation of about 1,800 metres (5,906 feet) above sea level.

Based on the 2007 Census conducted by the Central Statistical Agency of Ethiopia
(CSA), Bahir Dar Special Zone has a total population of 221,991, of whom 108,456
are men and 113,535 women; 180,174 or 81.16% are urban inhabitants, the rest of
population are living at rural kebeles around Bahir Dar. At the town of Bahir Dar
there are 155,428 inhabitants; the rest of urban population is living at Meshenti, Tis
Abay and Zege towns which are part of Bahir Dar Special Zone. Bahir Dar "is not
only one of the largest towns in Ethiopia, but also one of the fastest growing.

Bahir Dar is home to a number of universities and colleges. The most prominent of
all is the Bahir Dar University, which projects an enrollment of over 40,000 students
in the academic year beginning in October 2012.

Air transportation in Bahir Dar is served by the Bahir Dar Airport. Also known as the
Ginbot Haya Airport, it has paved runways. Ethiopian Airlines operates daily flights
through the facility, linking Bahir Dar and the capital, as well as with Gondar to the
northwest. In December 2014 a new domestic airline TNA started flights to Bahir Dar
but only on Mondays and Fridays.

Additionally, the city is also connected through roads (and buslines) to these cities.
The most common and convenient way of traveling in Bahir Dar is cycling. Auto
rickshaws and share taxis also provide transportation in the city. Intercity bus service
is provided by the Selam Bus Line Share Company and Sky Bus Transport System
which operates daily to and from the capital.

43
The whole project would require about 15,000 square meter of space in total. The
first phase of the project requires a space of 10,000 square meters for Factory,
Warehouse, office and utility buildings and when the second phase is implemented
additional 5,000 square meters is needed.

5.2 LAND LEASE FEES

In Amhara National Regional State the duration of land - lease holdings for Industry
purpose is up to 80 years. Lease - price payment may be made wholly at the signing
of the lease contract or periodically within 40 years with bank compound interest on
the unpaid balance.

A person, to whom lease-hold of urban land is permitted:

 Must make advance payment not less than 5% of the total lease
payment;

 Shall make payments every year, and the yearly payment shall amount
to the average price of the remaining lease payment divided over the
period of payment; and

 Shall pay interest over the remaining payment as per the rate of interest
on loan offered by banks.

The minimum lease price for 4th grade lease town with the 5th grade land is 8.57
Birr/m2/year

Therefore for this project it is assumed that advance payment of 5% of the total lease
payment and the unpaid balance shall pay periodically within 40 years. Therefore,
the total lease payment is Birr 10,284,000 (8.57Birr/m 2/year x 15,000m2 x
80years) and the advance payment will be Birr 514,000.

44
 CHAPTER SIX – ENVIRONMENTAL AND SOCIAL MANAGEMENT PLAN

The Environmental Impact Assessment (EIA) Study which covers Policy/ Legal
Frameworks, Environmental Issues of Importance Associated with the envisaged
operations, mitigation measures , and corresponding recommendations should be
prepared in separate volume. In this section only the environmental and social
management plan of the project presented breifely.

The Environment and Social Management Plan (ESMP) has been prepared to
address the major environmental and social impacts that would be encountered both
in the construction and operation phases. It enables the company to duly consider
the major environmental measures to be integrated into the project planning and
implementation.

The management plan is designed as to properly implement the mitigation measures

against the impacts that would arise as the result of the construction and operational
activities. The major components stated in the ESMP are limited to discussing the
major environmental, social, health and safety matters.

6.1 EFFLUENTS

Major impacts: Large quantities of water are used in wheat milling and oil mill for
conditioning of the seeds. Water pollution may result from discharge of liquid
effluents and runoff from waste piles may contain: BOD, COD, oil and grease,
Sulphides and Chromium.

Measures: The treatment required for wastewater will depend on the effluent
discharge requirements. The waste water coming out from the proposed plant will be
treated in the waste water treatment plant. Appropriate in‐site procedures concerning
waste water treatment shall also include in the normal operation instructions of the
envisaged plant.

6.2 PREVENTION OF ACCIDENTAL RELEASE

Major Impact: A major release or spill of raw materials, products or wastes can
affect the soil, surface water and ground water. Ground water is particularly
vulnerable to contamination by undetected leaks from tanks or pipelines.

45
Measures: The proposed plant is sited away from areas prone to natural disaster
(earthquakes, floods, etc.) and away from sensitive resources that cannot be
protected in the event of a major release.

The plant’s operating procedures will include frequent inspection of tanks and
pipelines for leakage.

All the necessary preventive measures will be taken during transporting oil products
to and from the Plant to avoid accidental spillages of oils into the environment.

The plant will be equipped with adequate provisions for containing and handling
spills and accidental discharge of potential contaminants.

6.3 VIBRATION AND NOISE

Major Impacts: During the operation of the plant, some offending noise will be
generated from different sources like compressors, generator and so forth. The noise
will not only affect employees but also the communities around.

Measures:

The noise level at any point in the plant emanating from engines and fluid velocities
in the piping shall not exceed 70dBA. Where this level is to be exceeded, wearing of
ear protection device shall become mandatory.

Noise will be minimized by silencers for the stack and charge air. Transmission of
vibration and structure borne noise is minimized by having the engine flexibly
mounted on to the foundation, to the building as well as pipes and steel structures.

Torsion vibration in the engine generator shaft system will be minimized by means of
a flexible coupling between the engine and generator.

Employees involved in the noisy operation will be provided with personal protective
equipment regularly.

Regular maintenance and services will be undertaken for machineries and different
plants.

The plant will use latest technologies also to avoid noisy operation.

46
6.4 SAFETY PLANNING

All offices, warehouses and process buildings shall be constructed with utmost
consideration for the safety of the workers and equipment. Laboratory building
construction shall take into consideration the safety of personnel and provision of
adequate ventilation as well as that for proper disposal of waste.

Material Safety Sheet (MSS) will be prepared with respect to all potentially
hazardous chemicals and materials.

The automatic control system for emergency shutdown of all strategic or critical
equipment in the plant shall be based on fail safe logic designs.

The construction work forces will be given orientation and trainings on safety
precautions by qualified and experienced safety officers to be assigned.

6.5 HAZARD MANAGEMENT

Potential hazards will be minimized and can be managed through the use of
engineering controls, administrative controls, personal protection, occupational
health and safety training, safety planning, and medical monitoring, as discussed
below:

A. Engineering Control

The unit operations will be laid out with acceptable standards so that incompatible
substances are not located within proximity of each other. Also incompatible
operations will not be located within proximity of each other (e.g. welding operations
should not be located near storage of ignitable materials).

Labeling of all switches, valves, containers, and unit operations will be undertaken so
that the specific hazardous substances are easily identified by their names.

Monitoring of the environment in the immediate vicinity of potential hazards will be

conducted periodically.

There will be provided both manual and automatic systems for shut down of
electrical systems and/or process operations, so that the release of hazardous
material is minimized.

47
B. Administrative Control

Administrative controls will be applied when it is not possible to reduce exposure to

acceptable levels through engineering controls.

C. Use of Personal Protective Equipment

There will be provided appropriate personal safety equipment for the workforces
where it is sensitive to potential hazards.

The type and level of protective gear can be defined and routinely used (e.g., hard
hats, chemical – resistant gloves, air purifying respirators, safety shoes, ear
protection, safety glasses).

Personal protection involves more than special clothing, glasses, hard hats, ear
plugs, etc., to protect the body from harm.

D. Occupational Health and Safety Training

Occupational health and safety training will be provided to ensure that personnel
adhere to appropriate operating practices which minimize adverse health and safety
impacts. The following areas of knowledge and experience are considered essential:

- Appreciation of the properties (e.g., flammability, corrosiveness, toxicity,

reactivity) of hazardous substances, as well as the levels at which they pose a
significant danger requiring protective measures.

- Awareness of early warning indicators of hazard/risk identification, and ability

to recognize potentially hazardous situations.

- Familiarity with engineering controls to avoid occurrence of hazardous

situations.

- Familiarity with capabilities and limitations of the facility to response to

hazardous emergencies: ventilation systems, plumbing systems, shut off
systems, containment devices, and emergency response procedures as
outlined in the appropriate health and safety plans.

- Knowledge of the use and maintenance of emergency response equipment,

as well as routine equipment for health and safety monitoring and protection.

48
 - Knowledge of methods and procedures for decontaminating personal,
equipment, and facility, following potential chemical contamination.

- Refresher training and regular drills simulating emergencies and appropriate

emergency response procedures.

- Familiarity with and acceptance of the need for continuous reliance on the
buddy system. In the buddy system, work groups are organized so that each
employee exposed to hazard is designated to be observed by at least one
other employee who would be ready and able to provide immediate
emergency assistance as needed.

- Empowerment to act decisively in accordance with health and safety plans

during potentially hazardous situations or actual emergencies, especially in
situations where supervisors are unavailable or have become victims of the
emergency.

6.6 EXPLOSION AND FIRE HAZARDS

Major Impacts: Fire may arise in the project or construction areas due to various
factors. A small fire at a point has a potential to widespread extensively and cause
massive destruction on the plants. The fire, if it is not well controlled may also
expand to the level that it can affect the neighboring local communities.

Measures: any fire hazards will be controlled by taking the following measures:

- A fire protection/fighting unit will be established to handle any fire hazards that
may break out in and around the plant.

- The necessary firefighting crew will be formed be given the required trainings
and orientations to make them capable to control fire hazards.

- Storage areas will be located away from area susceptible to fire hazard.

- There will be prepared and implemented designs and procedures at each

facility to reduce the danger posed by fire and explosion.

- The necessary emergency firefighting equipment will be provided. The plant’s

fire protection unit will consist of structural solutions, fire extinguishing
systems and fire alarm systems.

- To respond to disasters like explosion and fire hazards, the capacity of the
surrounding communities will be evaluated and strengthened, if necessary.
49
 - The plant will consist of firewalls/fireproofing of structures to protect against
fire hazards.

- There will be provided emergency exit or escape routes for employees in case
of fire hazards.

- The plant will prepare planning and training for evacuation.

- There will be established a buffer zone around the plant boundary.

- There will be provided safety and emergency training for employees on how
to fight and protect themselves against fire hazards.

- Adequate fire mitigation systems shall be provided in all identified fire risk
areas of the plant.

6.7 ENVIRONMENTAL TRAININGS

The company will ensure that the plant is manned 24 hours a day which will be in
three shifts and eight hours per day is assumed during a normal working days.

All staff employed at the plant will be framed in the following:

- General operation of the plant.

- Specific job roles and procedures

- Occupational health and safety and

- Contingency plan and emergency procedures

In addition to this, environmental training will be given to the staff employed at the
plant, and special environmental training will be given to the staff employed for the
environmental management unit (EMU). They will receive trainings in the following
areas:

- Day to day monitoring activities

- Collecting any analysis pertains to emission

- Monitoring effluents

- Industrial hygiene

- Occupational health, safety and emergency and contingency procedures.

50
51
 CHAPTER SEVEN – ORGANIZATION STRUCTURE AND MANPOWER

7.1 ORGANIZATION STRUCTURE

The organization structure mainly depends on capacity of plant and technology

involved. A lean and efficient organizational structure (as depicted in Figure 7.1
below) headed by Plant Manager, with the supporting staff has been envisaged.

FIGURE 7.1 PROPOSED ORGANIZATIONAL STRUCTURE

Plant Manager

Administration and Production and Sales and Purchasing

Finance Division Technical Division Division

Production Section Technical Section

The Plant Manger will be responsible for the overall operation and will be supported
by Division Heads of Production and Technical, Administration and Finance, and
Sales and Purchasing. Each Division Head is provided with his own supporting staff
for the proper functioning of the division. The production unit will led by production
head. The chart depicts the proposed organizational structure for the factory when
completed and becomes fully operational.

7.2 STAFFING PLAN, SALARIES AND BENEFITS

The personnel requirement has been planned keeping in view the following.

 Smooth and efficient running of the plant;

 Effective co-ordination among the various departments;

 Rational distribution of responsibilities; and

 Capacity utilization of the plant with optimum manpower.

52
The total personnel requirement for both the production plant and administration has
been estimated at 70 persons on the basis of functional requirements of a modern
plant and summarized in Table 7.1 by skill category together with costs. The table
shows annual salaries during full capacity plant operation based on current labor
market estimate. A detailed list is also provided in Annex 2.

TABLE 7.1: PERSONNEL REQUIREMENT AND ANNUAL COSTS

Head Direct labor Indirect

No Description Total
Count cost labor cost
1 Manager's Office 2 132,000 132,000
2 Administration & Finance 14 306,000 306,000
4 Sales & Purchasing 3 138,000 138,000
5 Production & Technical 51 888,000 324,000 1,212,000
Total 70 888,000 900,000 1,788,000
In addition to the salary, expenses for fringe benefits like pension, various
allowances, incentives and bonuses etc., estimated at 25% of the total salary/year
should be added which comes out to be Birr 2,235,000.

7.3 TRAINING

Training of the required manpower for the project has to be planned well in advance.
The key personnel should be selected and trained suitably. The training may be
carried out in the following manner:

 On job training during the commissioning phase of the project; and

 On job training during operation of the plant immediately after commissioning.

The training of the key operating personnel operators should be suitably carried out
during commissioning and operation phases in addition to training them by visits to
similar operational plants.

The training program should include the following aspects, among others, so as to
impart knowledge and training to the key personnel in relevant aspects.

 Understanding the functions of various units;

 Understanding the equipment in respective sections and the important parts

and control in each equipment;

 The hazards in respective sections and precautions to be taken for safety of

the equipment and personnel;
53
  Inspection, preparation and startup of equipment in respective sections;

 Routine operation of respective sections;

 Shutdown procedures for respective sections; and

 Procedure for attending to emergency stoppage due to failure of power, water

and air supply.

Besides training, the key operating staff described above, in plant training should
also be given to other employees at skilled operating level to enable them to
understand the process equipment in the project and prepare them operate and
maintain their respective sections safely, efficiently and skillfully.

54
 CHAPTER EIGHT – IMPLEMENTATION

8.1 IMPLEMENTATION SCHEDULE

The main activities in the implementation of the project are indicated in the Gantt
(scheduling) chart of Figure 8.1. The chart shows that about 6 months (24 weeks)
would be required for the implementation of the project including the preparation
time.

The tight project implementation schedule assumes that an efficient project

management team would be assigned from the very start of the project. The
activities on the critical path of the implementation are applying for a loan and
approval; purchasing of machinery and equipment; delivery and erection of
machinery and equipment; and plant commissioning. Any delay in one of these
activities results in delaying the project implementation period and vice versa.
Therefore, the project management team has to monitor the progress of these
activities very closely so that the project could be completed as early as possible.

As it is intended to construct simple buildings, the time allocated for this purpose is
about five months or 20 weeks only. Next to construction of buildings, the longest
time consuming activity, about 16 weeks, is delivery and erection of plant machinery
and equipment.

Personnel recruitment is shown to be executed in parallel with the delivery of

machinery and equipment, well ahead of the start of commissioning. This is done
due to the need for preparing and training the personnel required for plant erection
and commissioning as well as production activities.

55
 FIGURE 8.1: IMPLEMENTATION SCHEDULE

No Activities Time table (in Weeks)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Applying for a loan and

1
approval

2 Building and civil construction

Purchasing of machineries &

3
equipment

4 Installing utilities

5 Hiring labors

Installing and commissioning

6
of machineries

7 Purchasing raw materials

8 Training and trial production

56
8.2 IMPLEMENTATION COST

It is assumed some costs will be incurred such as for project engineering; project
management, production know-how transfer (training of workers); and start-up cost.
These costs are as follow:

TABLE 8.1: SUMMARY OF IMPLEMENTATION COST (000’ BIRR)

Local Foreign
No Description Total
Cur. Cur.
1 Project engineering (1% fixed inv. less land) 33 26 59
2 Project management (2% fixed inv. less land) 65 53 118
3 Training 50 - 50
4 Start-up & commissioning expenditures (1 days prod) 211 - 211
5 Bank charges on loan (0.75% loan amount) 58 - 58
6 Other expenditures (sales promotion, sales network, etc.) 50 - 50
Total 467 79 546

All these costs are amortized over the project years. Consequently, the annual
amortization amount would be Birr 54,600.

57
 CHAPTER NINE - FINANCIAL ANALYSES

9.1 BASIC ASSUMPTIONS FOR FINANCIAL ANALYSES

9.1.1 PROJECT LIFE

According to the implementation plan of the project, the construction period allotted for
the entire project from the start of applying for loan to the final commissioning is six
months. With regard to operational life of the project, a standard assumption of 10 years
is considered. Hence, the costs and benefits of the project are computed over 11 years.

9.1.2 REPAIR AND MAINTENANCE COST

The annual cost of spare parts, repair and maintenance usually increases with the
increase in the service life of machinery and equipment and other facilities. In the
present study, considering the heavy wear and tear of some of the machines a value
equivalent to 3% and 5% of the cost of machinery and equipment is assumed for the
annual cost of spare parts during the first three years and the remaining years of the
project life, respectively. The same assumption is also used for the annual cost of repair
and maintenance of the production plant. The annual cost of repair and maintenance of
other facilities is taken to be 2% of the cost of fixed assets other than land, machinery
and equipment during the first three years, and 3% of the same thereafter.

9.1.3 DEPRECIATION AND AMORTIZATION

Based on the Business Income Tax Proclamation Number 286/94, the following
depreciation rates are applied to depreciate the assets of the project:

 Buildings and associated Civil works 5%, linear to scrap value

 Machinery and Equipment 20%, linear to scrap value

 Computer and Software Products 25%, linear to scrap value

 Pre-production expenditure 10%, linear to scrap value

9.1.4 TERMINAL (SALVAGE VALUE)

Salvage value of the project is computed based on the following rates

 Building 50%
 Machinery and equipment 10%
58
  Vehicles 15%
 Working Capital 100%

9.1.5 WORKING CAPITAL

The working capital requirement of the project during operation is calculated on the
basis of the minimum days of coverage needed for the different elements of the working
capital. Hence, the minimum days are specified as follows:-

TABLE 9.1: MINIMUM DAYS OF COVERAGE

Minimum Days of
No. Item
Coverage
1 Raw Materials
- Local 5 days
- Foreign 90 days
2 Work in progress 1 day
3 Finished product 1 day
4 Cash in hand 7 days
5 Accounts receivables 5 days
6 Accounts payable 0 day

9.1.6 DISCOUNTING

The total investment and equity capital of the project are discounted at 10 percent over
the life of the project.

9.1.7 INCOME TAX

According to the Investment Incentives and Investment Areas Reserved for Domestic
Investors Council of Ministers Regulations No.270/2012, the project is entitled to the
following incentives:

 Income tax exemption for 3 years

 Losses carry forward for 2 years, and
 Exemptions from payment of custom duty on machineries and equipment

For the rest of project’s life, a 30% tax rate is applied on the taxable income.

9.2 RESULT OF FINANCIAL ANALYSIS

The financial implication of the project and its viability is evaluated and tested based on
the investment plan detailed out in various parts of this report and the above
assumptions. Accordingly, the financial analysis results are as discussed below.
59
9.2.1 INVESTMENT COST

The total investment cost of the project is estimated at Birr 11.7 million (See Table 9.2).
From the total investment cost the highest share (Birr 9.7 million or 83%) is accounted
by fixed investment cost followed by initial working capital (Birr 1.4 million or 12%) and
pre operation cost (Birr 0.6 million or 5%).

TABLE 9.2: TOTAL INVESTMENT COSTS IN 000 BIRR

Cost
No. Item % Share
( in 000 Birr)
1 Fixed investment
1.1 Land lease advance payment 514 4.38%
1.2 Building and civil work 2,678 22.81%
1.3 Machinery and equipment 4,678 39.86%
1.4 Vehicles 1,600 13.63%
1.5 Office furniture and equipment 266 2.26%
Sub total 9,735 82.94%
2 Pre operating cost * 546 4.65%
3 Working capital ** 1,456 12.40%
Grand Total 11,737 100.00%
* Pre operating cost includes project implementation cost such as installation, startup, commissioning, project
engineering, and project management etc.
** The total working capital required at full capacity operation is Birr 11 million. However, only the initial working
capital of Birr 1.4 million during the first year of production is assumed be funded through external sources
during the remaining years the working capital requirement will be financed by funds generated internally (for
detail working capital requirement see Schedule 4).

9.2.2 COST OF PRODUCTION

The total cost of products at 100% capacity utilization is estimated at Birr 428.9 million.
Table 9.3 shows the total costs of production for a selected year. The costs of
production for the other years of operation are shown in Annex 1.

TABLE 9.3: COSTS OF PRODUCTION (YEAR SEVEN)

Cost
Items % share
( in 000 Birr)
Raw material 418,623 97.60%
Utilities 277 0.06%
Repair and maintenance 327 0.08%
Labour 1,212 0.28%
Labour overhead costs 303 0.07%
Administrative costs 2,262 0.53%
Depreciation 238 0.06%
Financial costs 184 0.04%
Marketing costs 5,475 1.28%
TOTAL 428,903 100.00%

60
9.2.3 FINANCIAL FLOW

The investment requirement of envisaged project would be financed by equity capital

and long & medium – term bank loan. Accordingly from the total 11.7 million financial
requirements the share of equity capital is envisaged to be Birr 3.5 million or 30% of the
total investment requirement. The remaining Birr 8.2 million or 70% of the total
investment is planned to be financed through bank loan (Table 9.4.)

TABLE 9.4: FINANCIAL FLOW (IN 000’ BIRR)

Year
Source of capital Pre-operation
Total
One Two
Equity capital 2,090 1,156 275 3,521
Long & Medium – term loan 4,878 2,696 642 8,216
Total investment capital 6,968 3,852 917 11,737

9.2.4 CASH FLOW

The projected cash flow of the envisaged project shows that the project would generate
positive net cash flows throughout the operation years. Cumulative cash flow generated
by the project towards the end of the first operation year will amount to Birr 32 million. At
the end of the project life, this amount will rise to Birr 713 million. Details are shown in
Schedule 5.

9.2.5 DISCOUNTED CASH FLOW

a) Internal Rate of Return

The internal rate of return (IRR) 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 in a bank
account. Accordingly, the IRR of the project is computed to be 1623% indicating the
viability of the project. (See Schedule 6)

b) 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.

61
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
389 million which is acceptable. (See Schedule 6)

c) Payback Period

The payback period, also called pay – off period is defined as the period required
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 a year, which is a reasonably
short period of time.

9.2.6 PROFITABILITY

Based on the projected profit and loss statement shown in Schedule 4, the project will
generate a profit throughout its operation life. Annual net profit after tax increases from
Birr 31 million at the beginning of the project to Birr 71 million during the last year of
operation. Net profit as % of sales revenue lies between 15 to 46% which is high.

9.2.7 BALANCE SHEET

The positive financial performances are manifested in the balance sheet. As can be
seen from the projected balance sheet depicted in Schedule 8, the net worth of the
project, which was about Birr 6.9 million at the beginning of the operation year, has
risen to Birr 726 million at the end of the project life.

Important financial efficiency ratios like current assets to current liabilities, and net cash
flow to sales all show that the project is highly liquid and has sound financial
performance.

9.2.8 BREAK-EVEN ANALYSIS

The break-even analysis establishes a relationship between production costs and

revenues. It indicates the level of production at which costs and revenue are in
equilibrium. To this end, using full capacity operation costs of year seven, the break-
even point for capacity utilization and sales value is computed as followed.

62
Brake Even Sales Value = Sales x (Fixed Cost + Financial Cost) = Birr 20,174,000
Sales - Variable Cost

Brake Even Capacity utilization = Brake even Sales Value X 100 = 3.8%
Sales Revenue

9.2.9 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 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 show that the project is highly liquid
and has sound financial performance. (See Schedule 4)

9.2.10 SENSITIVITY ANALYSES

A sensitivity analysis, on selected cost components, has been further conducted to test
the strength and viability of the project. In view of this, extreme conditions like cost
escalation on investment and production cost and a decrease of sales price due to
various factors have been therefore examined.

TABLE 9.5: SENSITIVITY ANALYSIS ON KEY VARIABLES

Equity Capital Total Investment

Item IRR NPV IRR NPV
in % (in 000’ Birr) in % (in 000’ Birr)
Investment cost
Increase by 5% 1553 389,305 522 388,698
Increase by 10% 1489 388,781 502 388,148
Increase by 15% 1430 388,257 484 387,599
Production cost
Increase by 5% 1501 330,106 505 329,523
Increase by 10% 1380 270,382 465 269,799
Increase by 20% 1135 150,935 384 150,351
Revenue
Decrease by 10% 1253 244,200 426 243,619
Decrease by 20% 943 122,842 323 122,263

As can be seen from the above Table the project is found to be sensitive to a
decrease in revenue and increase in production cost. The project can sustain a cost
escalation by above 20% increase in production cost and decrease in sales price.

63
FINANCIAL SCHEDULES

64
 Schedule 1
Initial Investment Costs
( '000 Birr)
Year 0 Year 1 Year 2 Total
Items
Loc. C. For. C. Loc. C. For. C. Loc. C. For. C. Loc. C. For. C.
Fixed investment 3,777 2,645 1,280 1,116 - 917 5,057 4,678
Land lease advance payment 514 - - - - - 514 -
Building & civil work 2,048 - 630 - - - 2,678 -
Machinery & equipment - 2,645 - 1,116 - 917 - 4,678
Vehicles 950 - 650 - - - 1,600 -
Office equipment & furniture 176 - - - - - 176 -
Computer & software products 90 - - - - - 90 -
Pre Production expenditures 467 79 - - - - 467 79
Working capital, initial - - 1,436 20 - - 1,436 20
4,244 2,724 2,716 1,136 - 917 6,960 4,777
Total
6,968 3,852 917 11,737

Schedule 2
Source of Finance
('000 Birr)
Amount
Source of Finance Financial terms
Yr 0 Yr 1 Yr 2 Total Share
Equity capital 2,090 1,156 275 3,521 30%
Long-term loan (8 years) 4,878 1,677 642 7,197 70% Loan payable in
Medium-term loan (5 years) - 1,019 - 1,019 installments. Grace period,
one year.
Total 6,968 3,852 917 11,737 100%

65
 Note: * The bank loan shall cover 70% of the cost of investment.

Schedule 3
Production Programme and Sales Revenue
('000 Birr)
Selling Production Years
No. Description Price/unit 1 2 3 4 5 6 7 8 9 10
Capacity utilization 33% 60% 75% 90% 100% 100% 100% 100% 100% 100%
1 Production Programme
Wheat flour tons 6,862 11,597 13,997 16,716 18,396 18,130 18,130 18,130 18,130 18,130
Bran tons 1,264 2,517 3,271 3,945 4,427 4,494 4,494 4,494 4,494 4,494
Infant Food tons - 1,188 2,160 2,700 3,240 3,600 3,600 3,600 3,600 3,600
Oil tons - - 495 900 1,125 1,350 1,500 1,500 1,500 1,500
Residual cake of oil seed tons - - 1,485 2,700 3,375 4,050 4,500 4,500 4,500 4,500
2 Total Sales Revenue 85,503 210,797 329,093 421,057 487,645 519,939 530,289 530,289 530,289 530,289
Wheat flour 12.00 82,343 139,164 167,962 200,595 220,752 217,555 217,555 217,555 217,555 217,555
Bran 2.50 3,160 6,293 8,177 9,862 11,068 11,234 11,234 11,234 11,234 11,234
Infant Food 55.00 - 65,340 118,800 148,500 178,200 198,000 198,000 198,000 198,000 198,000
Oil 60.00 - - 29,700 54,000 67,500 81,000 90,000 90,000 90,000 90,000
Residual cake of oil seed 3.00 - - 4,455 8,100 10,125 12,150 13,500 13,500 13,500 13,500

66
 Schedule 4
Proforma Profit & Loss Statement
('000 Birr)
Ref. Production Years
Description Sched. 1 2 3 4 5 6 7 8 9 10
Total Sales Revenue Sch. 9 85,503 210,797 329,093 421,057 487,645 519,939 530,289 530,289 530,289 530,289
Less Cost of Goods Sold Sch. 3 50,567 120,796 227,350 312,318 367,851 403,192 420,981 420,798 420,798 420,798
Gross Profit 34,935 90,001 101,743 108,738 119,794 116,747 109,308 109,491 109,491 109,491
Gross Profit Margin 41% 43% 31% 26% 25% 22% 21% 21% 21% 21%
Less Administrative Expenses Sch. 3 1,837 2,075 2,173 2,325 2,345 2,285 2,262 2,239 2,215 2,192
Profit (loss) before Interest, Sales Cost & Tax 33,099 87,926 99,571 106,413 117,450 114,462 107,046 107,253 107,276 107,299
Less Interest (Financial Costs) Sch. 8 415 592 560 466 372 278 184 108 31 7
Profit (loss) before Sales Cost & Tax 32,684 87,334 99,011 105,947 117,078 114,184 106,862 107,145 107,244 107,292
Less Selling & Dist'n Costs Sch. 3 1,028 2,280 3,463 4,383 5,049 5,372 5,475 5,475 5,475 5,475
Profit (loss) before Tax 31,657 85,054 95,548 101,564 112,029 108,812 101,386 101,669 101,769 101,817
Less Income Tax (30%) * * * 30,469 33,609 32,644 30,416 30,501 30,531 30,545
Net Profit (Loss) 31,657 85,054 95,548 71,095 78,420 76,169 70,971 71,169 71,238 71,272
Cumulative Net Profit (Loss) 31,657 116,710 212,258 283,353 361,773 437,942 508,912 580,081 651,319 722,591
Profit (loss) before Tax (w.o. ex. financing) 32,071 85,645 96,107 102,030 112,401 109,091 101,571 101,777 101,800 101,823
Less Income Tax, w.o. ex. financing (30%) * * * 30,609 33,720 32,727 30,471 30,533 30,540 30,547
Net Profit (Loss), w.o. External Financing 32,071 85,645 96,107 71,421 78,681 76,363 71,100 71,244 71,260 71,276
Cumulative Net Profit (Loss) 32,071 117,717 213,824 285,245 363,926 440,289 511,388 582,633 653,893 725,169
* Tax holiday period

Ratios (%)
Return on sales (net income by revenue) 37% 40% 29% 17% 16% 15% 13% 13% 13% 13%
Return on equity (net profit divided by equity) 975% 2416% 2714% 2019% 2227% 2163% 2016% 2021% 2023% 2024%
Return on assets (operating income divided by assets) 83% 71% 46% 37% 33% 26% 21% 19% 17% 15%
Return on total investment (Net profit + interest to investment) 342% 1141% 2070% 2761% 3522% 4262% 4952% 5643% 6335% 7028%

67
68
 Schedule 5
Cash Flow Table for Financial Planning (Source and Application of Funds)
('000 Birr)
Impl. Book
Description Ref. Yr. Production Years Value
0 1 2 3 4 5 6 7 8 9 10 11
Total Cash Inflow 6,968 36,493 87,340 97,101 72,648 79,951 76,945 71,394 71,408 71,478 71,512 12,838
1. Inflow of funds 6,968 3,852 917 - - - - - - - - -
Total equity Sch. 6 2,090 1,156 275 - - - - - - - - -
Borrowing (term loan) Sch. 6 4,878 1,677 642 - - - - - - - - -
Borrowing (medium term) Sch. 8 - 1,019 - - - - - - - - - -
Borrowing (overdraft) - - - - - - - - - -
Increase in overdraft - - - - -
2. Inflow from operation - 32,642 86,423 97,101 72,648 79,951 76,945 71,394 71,408 71,478 71,512 -
Profit after tax Sch. 10 - 31,657 85,054 95,548 71,095 78,420 76,169 70,971 71,169 71,238 71,272 -
Depreciation Sch. 7 - 985 1,370 1,553 1,553 1,531 776 423 240 240 240 -
3. Other income - - - - - - - - - - - 12,838
Salvage value of assets a - - - - - - - - - - - 1,370
Recoverable assets b - - - - - - - - - - - 11,468
Total Cash Outflow 6,968 4,461 4,119 3,924 3,313 2,598 2,010 1,302 899 290 80 -
4. Investment
Fixed investment Sch 5&6 6,422 2,396 917 - - - - - - - - -
Pre-Production expenditures Sch 5&6 546 - - - - - - - - - - -
Incremental working capital Sch 4 - 1,456 2,179 2,821 2,210 1,494 906 403 (1) (0) (0) -
5. Loan repayment
Term loan (Principal) Sch. 8 - 610 1,023 1,103 1,103 1,103 1,103 900 900 290 80 -
Overdrft (Principal) Sch.8 - - - - - - - - - - - -
Net cash flow - 32,032 83,221 93,177 69,335 77,353 74,935 70,091 70,510 71,188 71,431 12,838
Cumulative Net cash flow - 32,032 115,253 208,430 277,764 355,117 430,053 500,144 570,654 641,842 713,274 726,112
Payback (years) = 1
Note: a. Salvage value of assets is taken to be the book value of fixed assets.
b. Recoverable asset is taken to be the net working capital.

69
 Schedule 6
Discounted Return on Equity Capital Invested
('000 Birr)
Impl. Book
Production Years Value
Description Ref. Yr.
0 1 2 3 4 5 6 7 8 9 10 11
Total Cash Inflow 4,878 35,338 87,065 97,101 72,648 79,951 76,945 71,394 71,408 71,478 71,512 12,838
1. Inflow of funds 4,878 2,696 642 - - - - - - - - -
Borrowing (long & med-term) Sch. 8 4,878 2,696 642 - - - - - - - - -
Borrowing (short term) - - - - - - - - - - - -
2. Inflow from operation - 32,642 86,423 97,101 72,648 79,951 76,945 71,394 71,408 71,478 71,512 -
Profit after tax Sch. 10 - 31,657 85,054 95,548 71,095 78,420 76,169 70,971 71,169 71,238 71,272 -
Depreciation Sch. 7 - 985 1,370 1,553 1,553 1,531 776 423 240 240 240 -
3. Other income - - - - - - - - - - - 12,838
Salvage value of assets a - - - - - - - - - - - 1,370
Recoverable asset b - - - - - - - - - - - 11,468
Total Cash Outflow 6,968 4,461 4,119 3,924 3,313 2,598 2,010 1,302 899 290 80 -
4. Investment
Fixed investment Sch 5&6 6,422 2,396 917 - - - - - - - - -
Pre-Production expenditures Sch 5&6 546 - - - - - - - - - - -
Incremental working capital Sch 4 - 1,456 2,179 2,821 2,210 1,494 906 403 (1) (0) (0) -
5. Loan repayment
Long& med-term loan (Principal) Sch. 8 - 610 1,023 1,103 1,103 1,103 1,103 900 900 290 80 -
Short-term loan (Principal) - - - - - - - - - - - -
Net cash flow (2,090) 30,876 82,946 93,177 69,335 77,353 74,935 70,091 70,510 71,188 71,431 12,838
Cumulative Net cash flow (2,090) (2,090) 28,786 80,856 121,962 150,190 199,315 225,126 269,407 295,636 340,595 367,067
Net present value (@ 10%) 389,829
Internal rate of return (IRR) 1623%
Note: a. Salvage value of assets is taken to be the book value of fixed assets.
b. Recoverable asset is taken to be the net working capital.

70
 Schedule 7
Discounted Return on Total Capital Invested
('000 Birr)
Impl. Yr. Production Years Book Value
Description Ref.
0 1 2 3 4 5 6 7 8 9 10 11
Total Cash Inflow - 33,056 87,015 97,660 72,974 80,211 77,140 71,523 71,484 71,500 71,516 12,838
1. Inflow from operation - 33,056 87,015 97,660 72,974 80,211 77,140 71,523 71,484 71,500 71,516 -
Profit after tax without Sch. 10 - 32,071 85,645 96,107 71,421 78,681 76,363 71,100 71,244 71,260 71,276 -
external Financing
Depreciation Sch. 7 - 985 1,370 1,553 1,553 1,531 776 423 240 240 240 -
2. Other income - - - - - - - - - - - 12,838
Salvage value of assets a - - - - - - - - - - - 1,370
Recoverable asset b - - - - - - - - - - - 11,468
Total Cash Outflow 6,968 3,852 3,096 2,821 2,210 1,494 906 403 (1) (0) (0) -
3. Investment
Fixed investment Sch 5&6 6,422 2,396 917 - - - - - - - - -
Pre-Production expenditures Sch 5&6 546 - - - - - - - - - - -
Incremental working capital Sch 4 - 1,456 2,179 2,821 2,210 1,494 906 403 (1) (0) (0) -
Net cash flow (6,968) 29,204 83,920 94,839 70,764 78,717 76,233 71,120 71,485 71,500 71,516 12,838
Cumulative Net cash flow (6,968) 22,236 106,156 200,995 271,759 350,476 426,710 497,830 569,315 640,815 712,331 725,169
Net present value(@ 10%) 389,247
Internal rate of return (IRR) 544%
Note: a. Salvage value of assets is taken to be the book value of fixed assets.
b. Recoverable asset is taken to be the net working capital.

71
 Schedule 8
Projected Balance Sheet
('000 Birr)
Con.Yr. Production Years
Description Ref. Sch. 0 1 2 3 4 5 6 7 8 9 10
Fixed assets
Fixed investment Inv.prog 6,422 8,818 9,735 9,735 9,735 9,735 9,735 9,735 9,735 9,735 9,735

Pre-production expenditures Inv.prog 546 546 546 546 546 546 546 546 546 546 546
Total Fixed Assets 6,968 9,364 10,281 10,281 10,281 10,281 10,281 10,281 10,281 10,281 10,281

Less acc. Depr'n & ammortiz'n Sch 7 - 985 2,355 3,908 5,461 6,992 7,768 8,191 8,431 8,671 8,911
Net fixed assets 6,968 8,379 7,926 6,373 4,820 3,290 2,513 2,090 1,850 1,610 1,370
Current assets
Cash on hand & at bank Sch 4&11 - 32,050 115,282 208,474 277,805 355,162 430,098 500,189 570,699 641,887 713,319

Debtors (recievables) Sch 4 - 469 1,155 1,803 2,307 2,672 2,849 2,906 2,906 2,906 2,906

Stocks Sch 4 - 969 2,450 4,607 6,317 7,443 8,172 8,518 8,517 8,517 8,517
Total current assets - 33,487 118,887 214,885 286,430 365,277 441,119 511,613 582,122 653,310 724,741
less Current liabilities
Creditors (payables) Sch 4 - - - - - - - - - - -

Overdraft Sch 11 - - - - - - - - - - -

Total current liabilities - - - - - - - - - - -

Total working capital - 33,487 118,887 214,885 286,430 365,277 441,119 511,613 582,122 653,310 724,741
Total net assets 6,968 41,867 126,814 221,258 291,250 368,567 443,632 513,703 583,972 654,920 726,112
Financed by
Paid-up capital Sch 6 2,090 3,246 3,521 3,521 3,521 3,521 3,521 3,521 3,521 3,521 3,521

Loan and Credit Sch 8 4,878 6,964 6,583 5,479 4,376 3,273 2,169 1,270 370 80 0

Retained profits (Losses) Sch 10 - 31,657 116,710 212,258 283,353 361,773 437,942 508,912 580,081 651,319 722,591

Total 6,968 41,867 126,814 221,258 291,250 368,567 443,632 513,703 583,972 654,920 726,112

72
 Schedule 9
Repayment of Loan (Debt Financing Schedule)
('000 Birr)
Impl.
Total Yr. Operation Years
Description Disbursement 0 1 2 3 4 5 6 7 8 9 10
Repayment of Term Loan
1. Borrowing 7,197 4,878 2,696 642 - - - - - - - -
Long-term loan (8 years) 4,878 1,677 642
Medium-term loan (5 years) - 1,019 -
2. Accrued Interest - - 415 592 560 466 372 278 184 108 31 7
Long-term loan 8.5% - 415 505 490 414 337 261 184 108 31 7
Medium-term loan 8.5% - - 87 69 52 35 17 (0) - - -
3. Repayment of Principal - - 610 1,023 1,103 1,103 1,103 1,103 900 900 290 80
Long-term loan - 610 819 900 900 900 900 900 900 290 80
Medium-term loan - - 204 204 204 204 204 - - - -
4. Repayment of Interest - - 415 592 560 466 372 278 184 108 31 7
Long-term loan - 415 505 490 414 337 261 184 108 31 7
Medium-term loan - 87 69 52 35 17 (0) - - -
5. End of Year Balance - 4,878 6,964 6,583 5,479 4,376 3,273 2,169 1,270 370 80 0
Long-term loan 4,878 5,945 5,768 4,868 3,969 3,069 2,169 1,270 370 80 0
Medium-term loan - 1,019 815 611 408 204 - (0) - - -
6. Term Debt - 4,878 6,964 6,583 5,479 4,376 3,273 2,169 1,270 370 80 0
Repayment of Overdraft
1. Borrowing - - -
2. Accrued Interest - - - - - - - - - - - -
3. Repayment of Principal - - - - - - - - - - - -
4. Repayment of Interest - - - - - - - - - - - -
5. End of Year Balance - - - - - - - - - - - -
Repayment of Interest, Total - - 415 592 560 466 372 278 184 108 31 7

73
ANNEXES

74
 Annex 1
Annual Costs of Production & Expenses
('000 Birr)
Ref. Production years
Cost item Sch. 1 2 3 4 5 6 7 8 9 10
Capacity utilization 33% 60% 75% 90% 100% 100% 100% 100% 100% 100%
I. Costs of Goods Manufactured 50,567 120,796 227,350 312,318 367,851 403,192 420,981 420,798 420,798 420,798
1. Direct & auxiliary materials Mtrls 49,082 118,433 224,499 309,064 364,421 400,481 418,623 418,623 418,623 418,623
2. Spare parts M& Eqpt 79 113 140 234 234 234 234 234 234 234
3. Utilities 79 144 180 216 240 240 240 240 240 240
4. Labour, direct HR 366 666 833 999 1,110 1,110 1,110 1,110 1,110 1,110
5. Factory Overheads 960 1,440 1,698 1,805 1,846 1,127 773 590 590 590
-Salaries & wages (+ benefits) 134 243 304 365 405 405 405 405 405 405
-Repair & maintenance 32 45 56 94 94 94 94 94 94 94
-Depreciation & amortization Sch. 7 774 1,127 1,310 1,310 1,310 591 238 55 55 55
-Insurance 13 13 13 13 13 13 13 13 13 13
-Supplies & services 8 11 14 23 23 23 23 23 23 23
II. Selling & Dist'n (Marketing) Costs 1,028 2,280 3,463 4,383 5,049 5,372 5,475 5,475 5,475 5,475
-Salaries & wages (+ benefits) HR 173 173 173 173 173 173 173 173 173 173
-Other costs (% sales) 1% 855 2,108 3,291 4,211 4,876 5,199 5,303 5,303 5,303 5,303
III. General & Adm. Expenses 2,251 2,667 2,732 2,791 2,717 2,563 2,446 2,346 2,247 2,199
1. Administrative Overheads 1,837 2,075 2,173 2,325 2,345 2,285 2,262 2,239 2,215 2,192
Salaries & wages (+ benefits) HR 181 329 411 493 548 548 548 548 548 548
Land lease 1,124 1,102 1,080 1,058 1,036 1,014 992 970 948 926
Repair & maintenance 76 101 101 152 152 152 152 152 152 152
Depreciation 211 243 243 243 220 185 185 185 185 185
Insurance 10 10 10 10 10 10 10 10 10 10
Fuel & lubricants 64 86 86 129 129 129 129 129 129 129
Travelling and perdiem 27 49 82 74 82 82 82 82 82 82
Supplies & services 57 57 57 57 57 57 57 57 57 57
Miscellaneous 87 99 103 111 112 109 108 107 105 104

2. Financial costs (interest) Sch. 8 415 592 560 466 372 278 184 108 31 7
Total Operating Costs 53,846 125,744 233,546 319,492 375,616 411,127 428,903 428,620 428,520 428,472

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 Annex 2
MANPOWER REQUIREMENT AND ESTIMATED ANNUAL LABOUR COST
Ser. Head Monthly Salary (Birr) Annual Salary
Description
No. Count Rate Total (Birr)
I Manager's Office 2 11,000 132,000
1 Plant Manager 1 8,000 8,000 96,000
2 Executive Secretary 1 3,000 3,000 36,000
II Administration & Finance 14 25,500 306,000
1 Administration and Finance Head 1 6,000 6,000 72,000
2 Accountant 1 4,000 4,000 48,000
3 Cashier 1 2,000 2,000 24,000
4 Store Keeper 1 1,500 1,500 18,000
5 Driver 4 1,500 6,000 72,000
6 Guard 6 1,000 6,000 72,000
III Sales & Purchasing 3 11,500 138,000
1 Marketing Head 1 6,000 6,000 72,000
2 Sales Representative 1 3,000 3,000 36,000
3 Purchaser 1 2,500 2,500 30,000
IV Production & Technical 51 101,000 1,212,000
1 Production Head 1 7,000 7,000 84,000
2 Shift Miller 2 3,000 6,000 72,000
3 Pre-cleaning Helper 2 2,000 4,000 48,000
4 Cleaning and Milling Helper 4 2,000 8,000 96,000
5 Cleaners 4 1,500 6,000 72,000
6 Mixer Operator for Infant Food 2 3,000 6,000 72,000
7 Plant Operator for Oil Mill 2 3,000 6,000 72,000
8 Packing Supervisor 2 3,000 6,000 72,000
9 Packing Operator 2 2,000 4,000 48,000
10 Packers for all 20 1,500 30,000 360,000
11 Pallet Transporter 4 1,000 4,000 48,000
12 Senior Mechanics 2 3,000 6,000 72,000
13 Mechanic 2 2,000 4,000 48,000
14 Electrician 2 2,000 4,000 48,000
Total, monthly/annual salary 70 149,000 1,788,000

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 Annex 3
Net Working Capital Requirement
( '000 Birr)
Days of Production Years
Description Coverage 1 2 3 4 5 6 7 8 9 10
1. Current assets 1,456 3,634 6,455 8,665 10,160 11,066 11,469 11,468 11,468 11,468
1.1 Accounts receivable (debtors) 5 469 1,155 1,803 2,307 2,672 2,849 2,906 2,906 2,906 2,906
1.2 Inventory 969 2,450 4,607 6,317 7,443 8,172 8,518 8,517 8,517 8,517
a) Materials
- Local materials 5 672 1,614 3,061 4,215 4,970 5,461 5,710 5,710 5,710 5,710
- Imported materials 90 - 146 266 333 399 444 444 444 444 444
b) Spare parts in stock 90 20 28 35 58 58 58 58 58 58 58
c) Work-in-Progress 1 139 331 623 856 1,008 1,105 1,153 1,153 1,153 1,153
d) Finished Products 1 139 331 623 856 1,008 1,105 1,153 1,153 1,153 1,153
1.3 Cash-in-hand 7 18 29 45 41 45 45 45 45 45 45
2. Current liabilities - - - - - - - - - -
2.1 Accounts payable (creditors) - - - - - - - - - - -
3. Working capital
3.1 Net working capital (1) - (2) 1,456 3,634 6,455 8,665 10,160 11,066 11,469 11,468 11,468 11,468
3.2 Increase in working capital 1,456 2,179 2,821 2,210 1,494 906 403 (1) (0) (0)
3.3 Foreign component (%) 1.3% 4.8% 4.7% 4.5% 4.5% 4.5% 4.4% 4.4% 4.4% 4.4%

77
 Annex 4
Depreciation & Amortization of Fixed Assets
('000 Birr)
Book
Description
Ref. Production Years val.
Sch.
1 2 3 4 5 6 7 8 9 10 11
A. Fixed Investment
1. Land lease advance payment 51 51 51 51 51 51 51 51 51 51 -
2. Building & civil work 102 134 134 134 134 134 134 134 134 134 1,370
3. Machinery & equipment Sch.1 529 752 936 936 936 407 183 - - - -
4. Vehicles Sch.1 190 320 320 320 320 130 - - - - -
5. Office equipment & furniture Sch.1 35 35 35 35 35 - -
6. Computer & software products Sch.1 23 23 23 23 - - - - - - -
Sub-total of A 930 1,315 1,498 1,498 1,476 722 369 185 185 185 1,370
Cumulative Sub-total 930 2,245 3,744 5,242 6,718 7,440 7,809 7,994 8,179 8,365 9,735
B. Pre-production expenditure Sch.2 55 55 55 55 55 55 55 55 55 55 -

Cumulative 55 109 164 218 273 328 382 437 492 546 546
Total A & B 985 1,370 1,553 1,553 1,531 776 423 240 240 240 1,370
Cumulative 985 2,355 3,908 5,461 6,992 7,768 8,191 8,431 8,671 8,911 10,281

78