PROJECT PROFILE ON SOCIAL WORK (DE-ADDICTION AND REHABLITATION CENTRE)

PROJECT PROFILE ON SOCIAL WORK (DE-

ADDICTION AND REHABLITATION
CENTRE)

NOVEMBER 25, 2022

ADDIS ABEBA CITY ADMINISTRATION INVESTMENT COMMISSION
A.A

CONSULTANT:- SHIBAG MANAGEMENT AND

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TABLE OF CONTENT

1. BACKGROUND INFORMATION...................................................................................................................6

1.1 INTRODUCTION ........................................................................................................................................... 6

1.2 SERVICE DESCRIPTION AND APPLICATION .................................................................................................6
1.3 PROJECT LOCATION AND JUSTIFICATION ..................................................................................................8
1.3.1 Location of Addis Ababa ......................................................................................................................... 8
1.3.2 Demography of Addis Ababa ................................................................................................................... 8
1.3.3 Economic activity of Addis Ababa ........................................................................................................... 8
1.4. WHY IS IT BENEFICIAL TO INVEST IN ADDIS ABABA? ................................................................................................ 10
1.4.1. The city benefit from the investment .................................................................................................12

2. MARKETING STUDY ....................................................................................................................................13

2.1 MARKET ANALYSIS SUMMARY .................................................................................................................. 13
2.2 NUMBER OF REHABILITATION CENTERS IN ETHIOPIA .............................................................................. 13
2.3 REHABILITATION CENTER DEMAND PROJECTION..................................................................................... 13

3. TECHNOLOGY AND ENGINEERING ........................................................................................................15

3.1 TECHNOLOGY ........................................................................................................................................... 15

3.1.1 Service capacity ....................................................................................................................................16
3.1.2 Service program ....................................................................................................................................16
3.2 ENGINEERING ........................................................................................................................................... 17
3.2.1 Land, buildings and civil works ............................................................................................................. 17
3.2.2 Machinery and equipment ..................................................................................................................... 19

4. ORGANIZATIONAL STRUCTURE .........................................................................................................................20

5. FINANCIAL ANALYSIS .....................................................................................................................................21

5.1 GENERAL .....................................................................................................................................................21

5.2 INITIAL FIXED INVESTMENT COSTS.................................................................................................................. 22

5.3 WORKING CAPITAL.....................................................................................................................................23
5.4 PROJECT FINANCING .....................................................................................................................................23
5.5 PRODUCTION COSTS ...................................................................................................................................24
5.5.1 Material inputs ......................................................................................................................................24
5.5.2 Utilities ................................................................................................................................................. 24
5.5.3 Over heads ............................................................................................................................................ 26
5.5.4 Financial costs ......................................................................................................................................27
5.5.5 Depreciation ......................................................................................................................................... 27
5.6 BREAK EVEN POINT AND ROI ..................................................................................................................... 28
5.6.1 Break Even point (BEP)...................................................................................................................... 28

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5.6.2 Return on investment ........................................................................................................................ 29

5.7 PROJECT BENEFITS ................................................................................................................................29

ANNEXES ................................................................................................................................................................31

LIST OF TABLES

Table 1: Projected and unsatisfied demand .................................................................................................. 14

Table 2: Service program ............................................................................................................................. 17
Table 3 Building costs ................................................................................................................................. 18
Table 4 Land lease period in Addis Abeba .................................................................................................. 18
Table 5 Land lease floor price in Addis Abeba ............................................................................................ 19
Table 6: Lists of required machinery, equipment and other facilities........................................................... 19
Table 7Manpower requirement and labour costs ......................................................................................... 20
Table 8 Initial Fixed investment costs .......................................................................................................... 22
Table 9 Utilities of the factory’000”Birr ...................................................................................................... 25
Table 10 Overhead costs .............................................................................................................................. 26
Table 11 Depreciation in Birr"000" ............................................................................................................. 27
Table 12 Annual total production costs”000” .............................................................................................. 32
Table 13 Calculation of working capital ...................................................................................................... 33
Table 14 Projected Net income statement "000" .......................................................................................... 35
Table 15 Debt services schedule and Computation ...................................................................................... 36
Table 16 Projected Cash flow statement ...................................................................................................... 37
Table 17 Total investment costs”000” ......................................................................................................... 38
Table 18 Total Assets .................................................................................................................................. 38
Table 19 Sources of finance ......................................................................................................................... 39
Table 20 Summary of financial efficiency tests ........................................................................................... 39
Table 21 Calculation of payback period”000” ............................................................................................. 40
Table 22 Calculation of NPV at 17% D.F. ................................................................................................... 41

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I. Executive summary
This project profile is prepared to assess the viability of running De-addiction and rehabilitation

center, in Addis Abeba city administration. Hence Market, Technical, Organizational and Financial

study was made to investigate the viability of the envisaged project.

This project profile on De-addiction and rehabilitation center has been developed to support the

decision –making process based on a cost benefit analysis of the actual project viability. This profile

includes marketing study, production and financial analysis, which are utilized to assist the decision-

makers when determining if the business concept is viable. Ethiopia has a private sector driven De-

addiction and rehabilitation center.

The De-addiction and rehabilitation center at full capacity operation can receive 4,000 addicted

persons (one thousand per quarter), per year.

The total investment capital including establishing the school is Birr 174,635 million. Out of the

total investment capital, the owners will cover Birr 52.39 million (30 %) while the remaining

balances amounting to Birr 122.24 million (70 %) will be secured from bank in the form of term

loan.

As indicated in the financial study, the cash flow projection of the project shows surplus from the

first year on. The net cash flows of the project range from Birr 22 Million in the first year to Birr 34

million at the end of the 10th year of operation. At the end of the 10th year of operation period the

cumulative cash balance reaches Birr 338.60 million.

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The Benefit-cost ratio and Net present value (NPV) have been calculated at 17% discount factor

(D.F) for 10 years of the project activity. Accordingly, the project has NPV of 184 million Birr at

17%D.F. and the benefit-cost ratio of 1.57 at 17% D.F.

Therefore, from the aforementioned overall market technical and financial analysis we can conclude

that the De-addiction and rehabilitation center is a viable and worthwhile.

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1. BACKGROUND INFORMATION

1.1 Introduction

This document was undertaken to show social work service sector on de-addiction and rehabilitation

work in Addis Ababa. In compiling the report, information from Addis Ababa investment

commission, Ministry of health, Ethiopian custom commission and published sources have been

augmented.

Presently, in spite of high demand and its crucial importance, number of de-addiction and

rehabilitation centers in the country is very low compared to number of addiction victims. This

constrained the achievement of economic, social and health related development goals and also

prevented the development of the country from accelerating.

Increase in number of number of de-addiction and rehabilitation center is fundamental importance

to Ethiopia’s present and future demand. In Ethiopia, the demand for number of de-addiction and

rehabilitation centers is expected to increase considerably in the next few decades as a result of

increased number of addiction victim citizens, number of population and increasing income levels.

Therefore, in a country like Ethiopia, it is important to identify gaps and potential in the development

of de-addiction and rehabilitation center.

1.2 Service Description and Application

Drug/Alcohol De-Addiction and Rehabilitation Centre is the place for treatment of the chronic, often

relapsing disease and also a place for the restoration of health both physically and psychologically.

De-addiction means a state of being free from addiction and rehabilitation means restoration of

someone to a normal life. The rehabilitation center will be a therapeutic community for addicts. It is

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the process of active change by which a person who has become addicts acquires the knowledge and

skills needed for optimum physical, psychological and social function.

Drug/Alcohol De-addiction and Rehabilitation Centre are envisaged for the people who are suffering

from the mental disease, Drug and Alcohol Addiction. Good health is not just about how people live.

It is about their quality of life, (physical health, education, family, employment, environment) and

how well people are during their extra years, so that they are not robbed of their dignity and

independence in later life.

Rehabilitation center is a temporary home away from home, a pathway back to individual stability

and societal development. And this short term stay will be a process to healing that brings changes

from the inside out. It involves the use of appropriate and available medical treatments, therapies,

prosthetics, social and environmental supports. It’s likely to require collaboration of health, social

service and other public agencies.

It is not limited to the role of the recognized rehabilitation professionals (physiotherapists,

occupational therapist and speech and language therapists etc). Instead of medication treatment

therefore, they provided the necessary tools to the community of patients in dealing with their own

problems, making them part of the process with which they could overcome their traumatic

experience.

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1.3 Project Location and Justification

1.3.1 Location of Addis Ababa

Addis Ababa is the seat of the Ethiopian federal government. It is located on the central highlands

of Ethiopia in the middle of Oromia Region. The absolute location is around the intersection point

of 901’48’’N latitude and 38°44′24″E longitudes. This is very near to the geographical center of the

country. It is, therefore, equidistant to the peripheral areas or is equally accessible to almost all parts

of Ethiopia. Addis Ababa is located on a well-watered plateau surrounded by hills and mountains.

The city is in the highlands on the edge of the Ethiopian rift valley or the eastern slopes of the Entoto

Mountain ranges bordering the Great Rift Valley. The total area of Addis Ababa is about 540 km2

of which 18.2 km2 are rural. Addis Ababa’s built-up urban area spans 474 km2. It is also the largest

city in the world located in a landlocked country.

1.3.2 Demography of Addis Ababa

According to the CSA (2013) population projection, Ethiopia’s total population reaches about 105

million people in 2022. Of the total population 22.9% (24 million people) live in urban areas.

Ethiopia’s urban population is expected to triple by 2037 (World Bank, 2015). Addis Ababa hosts

an estimated 3,859,638 people. Currently, Addis Ababa is experiencing an annual growth rate of

3.8% and is estimated to reach 4,696,629 inhabitants by 2032 (CSA, 2015).

1.3.3 Economic activity of Addis Ababa

The transformation of Addis Ababa has especially been rapid since 1991. According to the data from

the city’s Bureau of Finance and Economic Development (2006), per capital income of Addis Ababa

has grown from USD 788.48 in 2010 to USD 1,359 in 2015. The city also achieved a decline in the

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poverty index from a high of 29.6 in 2012 to 22.0 in 2014. Moreover, the current poverty headcount

index for Addis Ababa is estimated at 18.9 while the poverty severity account for 5 and 1.8 index

points respectively. Even though, the poverty status of Addis Ababa has an improvement over

previous years, there is still much work to be done to curb both the incidence and severity of poverty.

The major contributor to the economic growth of the city is the implementation of publicly financed

mega urban projects like condominium housing, the Light Rail Transit, the international airport and

industrial zone development (The state of Addis Ababa, 2017). The existence of international large

and medium-size enterprises in and around Addis Ababa have also significant role in creating huge

opportunity for employment and technology transfer. Furthermore, there are strong demand for

goods and services following the existence of many embassies and inter-governmental organizations

like the African Union, the United Nations Economic Commission for Africa.

The manufacturing sector’s contribution to Addis Ababa’s GDP is high. Despite the fact that 86%

of the industries in the city are micro and small scale (cottage and handicrafts, and small-scale), the

majority of the country’s large and medium scale industries are found in the city. Noticeable

increases are also registered currently in other aspects of industrial growth.

The service sector is both the largest contributor to the city’s economy and the largest employer. It

contributes to 76.4% of the city’s GDP while industry’s share makes up (almost all) the rest. This

sector is dominated by three major sub-sectors: Transport and communication; Real estate, Renting

and Business services; and Trade, Hotel and Restaurants. According to the state of Ethiopian Cities

2015 report, the service sector has also been responsible for more than 50% of the growth in the

estimated annual growth of the city’s GDP. Although 75% of employment in the city is also

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generated in the service sector, a large proportion of the employed work in low skill and low paying

jobs as shop salespersons, petty and 'gullit' traders, sales workers in small shops, domestic helpers

or doorkeepers and restaurant service workers.

Analysis of the economic structure of Addis Ababa reveals that the services sectors (63%) dominates

with industry (36%) in second place indicating that these sectors account for almost all of the Addis

Ababa’s GDP (The State of Addis Ababa, 2017).

Addis Ababa has a great share in the economy of the country due to its attractiveness to businesses,

companies, individuals and foreign direct investment. Overall primacy index of the city is 24.8 based

on urban employment and unemployment survey (CSA 2015). According to the State of Addis

Ababa 2017 report, the simultaneous high rates of economic growth and urbanization in Addis

Ababa indicates a likely further rising dominance of the city in Ethiopia’s economy as well as

growing agglomeration of economic activities in and around the city.

1.4. Why is it beneficial to invest in Addis Ababa?

Addis Ababa is the largest and most economically significant city in the country. Ethiopia’s urban

population share is only 17 percent (as of 2012, World Bank 2015). The city is the only urban area

in Ethiopia capable of delivering scale economies in terms of concentrated demand, specialization,

diversity and depth of skills, innovation, and technology transfers. Thus, investors will be benefited

in getting capable human power from the market.

The capital is the country’s main industrial hub. The city dominates industrial capacity in almost all

the braches of light manufacturing that Ethiopia prioritizes. As a result Addis Ababa completely

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dominates production in various subsectors. This can be taken as the political and social stability of

the city.

Overall, the city has a beautiful environment, favorable location, and strong industrial base. Its

advantage as an economic powerhouse of the country and human resource center are the most

attractive features for local and overseas investors.

Moreover, investors will be getting a comprehensive set of incentives for priority sectors. These

include:

 Customs duty free privilege on capital goods and construction materials, and on spare parts

whose value is not greater than 15% of the imported capital goods’ total value.

 Investors have the right to redeem a refund of customs duty paid on inputs (raw materials

and components) when buying capital goods or construction materials from local

manufacturing industries.

 Income tax exemption of up to 6 years for manufacturing and agro-processing, and up to 9

years for agricultural investment.

 Additional 2-4 years income tax exemption for exporting investors located within industrial

parks and 10-15 years exemption for industrial park developers.

 Loss Cary forward for half of the tax holiday period. Several export incentives, including

Duty Draw-Back, Voucher, Bonded Factory, and Manufacturing Warehouse, and Export

Credit Guarantee schemes.

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1.4.1. The city benefit from the investment

The city will be benefited from investment. These are discussed below.

 Employment opportunity

Investment is expected to provide direct and indirect employment. These range from

unskilled causal workers, semi-skilled and skilled employees.

 Improving growth of the economy

Through the use of locally available materials and exporting products, the investment

contributes towards growth of the economy by contributing to the growth of domestic

product. These eventually attract taxes including VAT which will be payable to the

government hence increasing government revenue while the cost of local materials will be

payable directly to the producers. In addition, domestic products save foreign exchange and

exports also bring money to the country.

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2. Marketing study

2.1 Market analysis summary

The current drive and emphasis by the government to make addicts free from alcohol and other drugs

requires adequate drug/alcohol de-addiction and rehabilitation center. Having undertaken a thorough

and comprehensive research of the market we realized that there was a vast opportunity for

drug/alcohol de-addiction and rehabilitation center. Aware of the fact that operating in such a market

is largely dependent on good networking; the promoter intends to establish networks and strategic

relationships with various stakeholders to sustain the market. In so doing the owner intend to ensure

that the service they provide are of good quality.

2.2 Number of rehabilitation centers in Ethiopia

Based on the assessment undertaken by the consultant, Ethiopia has limited number of rehabilitation

centers. Totally, there are four rehabilitation centers in Ethiopia; three in Addis Ababa and one in

Mekele. The total base year (2022) capacity of these centers are 1,300 addicts and this capacity is

assumed to increase by 5% annually. Based on the above assumption, the supply for the

rehabilitation center for the years 2023 – 2032 was calculated and presented in Table 1.

2.3 Rehabilitation center demand projection

The demand for drug/alcohol de-addiction and rehabilitation center can be influenced by a number

of factors. The size and growth rate of the population, increase in economic capacity of the

population, and awareness on addiction impacts are few among many variables. However, data on

some of these parameters are not readily available in Ethiopia. Consequently, it is difficult if not

possible to objectively quantify the actual demand. Nevertheless, for the purpose of this study,

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attempts have been made to forecast the likely future demand for drug/alcohol de-addiction and

rehabilitation center on the basis:

i. Ethiopian population is estimated to be 12, 202,679 as of today (2022)

ii. Annual growth of population is taken to be 2.5%

iii. Current (2002) number of addicts was estimated to be 0.5% of the total population

Based on the above stated assumption, demand for drug/alcohol de-addiction and rehabilitation

center was projected for the years 2023 -2032 and the unsatisfied demand is shown in Table 1.

Table 1: Projected and unsatisfied demand

Year Ethiopian Total estimated number Total number of addicts Unsatisfied
population of addicts (0.5% of the handled by rehabilitation Demand
pollution) centers
2022 120,202,679 601,013 1,300 599,713
2023 123,207,746 607,024 1,365 605,659
2024 126,287,940 613,094 1,433 611,661
2025 129,445,138 619,225 1,505 617,720
2026 132,681,267 625,417 1,580 623,837
2027 135,998,298 631,671 1,659 630,012
2028 139,398,256 637,988 1,742 636,246
2029 142,883,212 644,368 1,829 642,538
2030 146,455,292 650,811 1,921 648,891
2031 150,116,675 657,319 2,017 655,303
2032 153,869,592 663,893 2,118 661,775

As shown Table 1, the project will have unsatisfied demand for the coming 10 year’s period. The

projected demand will continue to be positive until 2032. It can be clearly noted that there is a huge

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gap between supply and demand figures, which can really be taken as the apparent demand-supply

gap for drug/alcohol de-addiction and rehabilitation center in Ethiopia.

3. Technology and engineering

3.1 Technology

Service process

Checking in Detox process Family counseling

Aftercare planning

 Checking in: when patient first arrive at a rehab program, staff members will often start by

having the patient complete an intake interview to find out more about him/her. This is an

important step in the rehab process, because this information will be used to start customizing

the treatment plan.

 Detox process: After the initial assessment, the patient will go through the detoxification

process. Detox is the process of removing drugs or alcohol from body after prolonged use.

Though this can be a difficult process for some, it's important to cleanse the patient body of

these substances so that he/she is ready both physically and mentally for the work that lies

ahead in rehab.

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 Therapy: various types of therapies (individual, group and family therapy) will be used

throughout the recovery process, depending on the patient needs and the rehab program the

patient is attending.

 Aftercare planning: Toward the end of the patient time in a rehab center, the patient and

his/her counselor will come up with a continuing care (aftercare) plan based on the patient

progress up to that point. Aftercare can significantly reduce drug and alcohol relapse rates.

The plan will include social and medical support services to help in patient transition. It may

include transitional housing (like a sober living home), follow-up therapy and counseling,

medical evaluations, alumni support groups, and other suggestions to help patient avoid the

situations and triggers that might cause patient to relapse.

3.1.1 Service capacity

In determining the capacity of the center, the future demands of the service and the economics of

scale of the available technologies were taken into consideration. According to the data obtained

from the market study, number of addicts will reach 655,303 in 2031 respectively. Thus, the envisaged

drug/alcohol de-addiction and rehabilitation center is intended to have a capacity to serve 1000 addicts

annually.

3.1.2 Service program

The project requires some years to penetrate into the market and capture a significant share. It will

start providing service at 70% of its capacity and will grow by 10% each year considering the market

penetration traits. The service program of the envisaged tour operator is given in Table 2.

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Table 2: Service program

Year of Production Capacity First Second Third Fourth

TOTAL
utilization quarter quarter quarter quarter
Year 1 70% 700 700 700 700 2,800
Year 2 80% 800 800 800 800 3,200
Year 3 90% 900 900 900 900 3,600
Year 4 100% 1,000 1,000 1,000 1,000 4,000

3.2 Engineering

3.2.1 Land, buildings and civil works

The required area (m2) and construction cost for the production facilities essential for the successful

operation of the project is shown in Table 3. A total area ready for the project is 4,020 m2. In order

to estimate the land lease cost of the project profiles it is assumed that all the project will be located

in different land level from level 1/1 to level 4/3, their current market lease price is from 39,073.31

birr per M 2 to 2,800.71 birr per M 2respectively. Therefore, for the profile a land lease rate of birr

3,885 per M 2 have been taken, which is between the ranges.

The cost of construction of building should be appropriate to the size and expected profitability of

business, costs of building generally differs by the type of construction materials used, the type of

foundation, wall height and location. The current building cost for simple storage and building is

from 10,000.00 Birr per m2 to 25,000.00 Birr per m2. The total construction cost of buildings and
2
civil works, at a rate of Birr 20,000 per m is estimated at Birr 136.40 million. Therefore, the total

cost of land lease and construction of buildings and civil works is estimated at Birr 152 million.

The proposed plant layout comprises the following buildings and structures.

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Table 3 Building costs

S/No Estimated cost per Total estimated cost

Descriptions Total area in square meter (in Birr) ( in Birr)
M2
1 Dormitory G+1 2,000 25,000.00 100,000,000.00
2 Laboratory room 500 20,000.00 10,000,000.00
4 Clinic room 500 20,000.00 10,000,000.00
7 Power station room 20 20,000.00 400,000.00
8 Administration office 500 20,000.00 10,000,000.00
11 parking 500 5,000.00 2,500,000.00
12 Fence Lump sum 3,500,000.00
Total 4,020 136,400,000.00

Table 4 Land lease period in Addis Abeba

Sector of development Period of Down

activity lease payment
Education, health, 90 10%
culture and sports
Industry 70 10%
(manufacturing )
commerce 60 10%
For urban agriculture 15 10%
For others 60 10%
Sources: - city government of Addis Abeba land development and management bureau

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Table 5 Land lease floor price in Addis Abeba

S/No Land level Current land lease Current lease price per M2
floor price per M2 (Market price )
1 1/1 2,213.25 39,073.31
2 1/2 2,165.47 36,825.73
3 1/3 1,900.19 34,578.15
4 ¼ 1,552.93 31,119.21
5 1/5 1,531.91 29,096.45
6 2/1 1327.39 27,073.71
7 2/2 1,221.18 25,050.96
8 2/3 1,191.17 23,028.21
9 2/4 1,074.39 21,005.46
10 2/5 1,027.84 18,982.71
11 3/1 994.71 16,959.96
12 3/2 960.21 14,937.21
13 3/3 927.84 12,914.46
14 ¾ 904.77 10,891.71
15 3/5 873.74 8,868.96
16 4/1 814.06 6,846.21
17 4/2 786.45 4,823.46
18 4/3 748.80 2,800.71
Sources: - city government of Addis Abeba land development and management bureau

3.2.2 Machinery and equipment

The list of machinery, equipment and other facilities required for provision of doctoral medicine

higher education is estimated to be Birr 12,955,000.00 (Table 6).

Table 6: Lists of required machinery, equipment and other facilities

S/N Description Unit Cost of Total Cost of the
Quantity Equipment(Birr) Equipment(Birr)
1 Laboratory equipment Lump sum 3,500,000.00 3,500,000.00
2 Medical simulation equipment Lump sum 3,700,000.00 3,700,000.00
Broadband internet line (supply & 250,000.00
1 250,000.00
3 Network Installation
7 Digital camera 1 30,000.00 30,000.00
8 Video camera 1 35,000.00 35,000.00
Satellite TV-set (Supply & 150,000.00
10 15,000.00
13 Installation)
14 Cafeteria facilities Set (2) 150,000.00 300,000.00
15 Other miscellaneous items Lump sum 1,000,000.00
Total 8,965,000.00

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4. Organizational structure
The selection of structure of the envisaged project is made based on the existing structure of

manufacturing plants operating in the country, the capacity, complexity and technology mix of the

plant. Organizational structure principles such as specialization, coordination, and

departmentalization are also considered for design of structure that best suits the envisaged project

4.1. Manpower requirement and annual manpower costs

Table 7Manpower requirement and labour costs

Description Number Monthly salary Annual salary, Birr

Center Manager 1 25,000.00 300,000.00
Secretory 1 10,000.00 120,000.00
Administrative and 1 20,000.00 240,000.00
finance manager
Psychiatrist (MD) 2 30,000.00 720,000.00
Psychiatric nurse 2 15,000.00 360,000.00
Social workers 2 12,000,00 288,000.00
Teachers 2 12,000.00 288,000.00
Skill instructors 2 15,000.00 360,000.00
House parents 3 8,000.00 288,000.00
Counselor 2 10,000.00 240,000.00
Security guard 2 6,000.00 144,000.00
Driver 1 10,000.00 120,000.00
Total 21 3,468,000.00

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5. Financial Analysis

5.1 General

The financial analysis evaluation of De-addiction and rehabilitation center project is mainly

consisted of capital investment as well as operating and maintenance costs. The capital investment

costs include fixed investment costs (initial fixed investment and replacement costs) and working

capital, while operating and maintenance costs comprise current expenses related to material inputs,

manpower cost, utility, repair and maintenance costs, spare parts, Overheads, Sales and distribution,

interest and depreciation expenses.

The financial analysis and evaluation has been conducted taking assumptions:

1. It is assumed that about 70% of the total capital investment costs including the working

capital requirement could be covered through development bank loans of short and long-

term credits. The remaining balance 30% will be covered by equity capital contribution of

the project owner.

2. Even though the project might secure loans under different term and conditions as well as

from different financial sources, for the purpose of calculation of debt service scheduling,

the current development bank of Ethiopia credit terms and conditions have been used.

Consequently. It is assumed that the project will secure loan facility on the basis of 11.5 %

annual interest rate.

3. Even though the estimated project production life is more 10 years, the financial analysis has

been undertaken for a period interval covering the first 10 years only, during which time

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most of the capital assets are assumed to be deprecated, debts recovered and pay-back period

accomplished.

4. It is assumed that the project will be start up production activity at 70 % capacity. During
years 2 & year 3 the projects is anticipated to gradually increase capacity utilization to reach
100% in year 4. Therefore, starting from year 4 the project will be operational at full capacity.
5. For the project under reference promotional, sales and distribution expenses have been
estimated at 3% of the sales revenue.
6. Maintenance and spare parts costs are 1.5% of the fixed investment costs.
7. Furniture and fixture costs assumed to be 500,000.00

5.2 Initial Fixed investment costs

Table 8 Initial Fixed investment costs

S/No Fixed investment Unit of Quantity Unit price Total Amount Remarks
type measurement
1 Land Square meter 4,020 3,885 15,617,700.00 The period of land
lease will be 70
birr/M2 years and 10% of
2 Buildings and civil Square meter 4,020 lump sum 136,400,000.00 the total lease
works amount will be
paid in the first
year
Sub total 152,017,700.00
3 Machineries set 2 Lump sum 8,965,000.00
4 Transformer set 1 Lump sum 2,000,000.00
5 Truck and vehicles Pcs 1 Lump sum 3,000,000.00
6 Furniture and Pcs 500,000.00
fixture
SUB TOTAL 14,465,000.00
Fixed capital 166,482,700.00
investment costs
7 pre-operational 2,000,0000.00
expenses
Working capital 6,152,000.00
TOTAL INVESTMENT COSTS 174,634,700.00

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5.3 Working capital

Working capital is the financial means required for smooth operation and maintenance of a project

mathematically, it is a difference between current assets and current liabilities. In the particular case

of the project under consideration, the current assets comprise receivables, inventories (local and

imported material inputs, spare parts, work in progress, and products ready for delivery) and cash in

hand, while current liabilities comprise accounts payable to creditors.

5.4 Project Financing

Fixed capital investment costs and working capital requirements are assumed to be financed by

equity capital of the owner and through loans of short and long-term credits.

The company obtains loans under different terms and condition as well as from different sources,

for the purpose of calculation of debt service scheduling the current development bank of Ethiopia

credit terms and conditions have been used. Accordingly, it is assumed that the company will be

able to obtain loan 70% of the total investment costs for construction of different buildings for

purchase of machineries. The remaining balance that of the total investment costs will be expected

to be covered by equity contribution of the project promoter.

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5.5 Production costs

As it is depicted in Annex Table 12 major categories of the total production costs are assembled into

the following cost elements.

5.5.1 Material inputs

In the project under study the basic material inputs are food, educational materials, medical

disposable materials, cleaning materials etc. Therefore, the current prevailing local and international

market prices have been used for estimation of material inputs costs. At full capacity operation the

material inputs costs are estimated at Birr 24 million per annum.

5.5.2 Utilities
In estimating costs of utility expenses for operation and maintenance of the project, Costs of fuel, oil and

lubricant, electricity and water consumptions have been taken in to consideration, the rates of which have

been estimated on the basis of the proposed capacity utilization program of the project and at the current

official charging rates. At full capacity operation the project will have the following utility expense per annum

which amounts to Birr 3.06 million.

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Table 9 Utilities of the factory’000”Birr

Start-up Full
Utility”000”Birr Capacity
Capacity utilization 70 % 80 % 90 % 100 %
Project year 1 2 3 4
Item description Unit of measurement
Fuel
Gasoline for service vehicle 50km*365days*47Birr/LIT*8km/Li 107 107 107 107
Change of oil and lubricant 10% of the fuel consumption
11 11 11 11
Sub-Total
118 118 118 118
Electricity 260days*24 hrs.*325kwh* 1.00Birr/kwh 1,420 1,623 1,825 2,028

Sub- Total 1,420 1,623 1,825 2,028

Water 365days*100m3/day*15 Birr/m3 384 438 493 548

Sub -Total 384 438 493 548

Telecommunication
Telephone 5 lines*
1,500Birr/month/line+18Birr/line/month 31.08 31.08 31.08 31.08
Mobile 5 lines*1,500 Birr/month/line 30.00 30.00 30.00 30.00
Fax 2line*1,000Birr/month + 17 Birr/line/month 12.40 12.40 12.40 12.40
Internet 25,000Birr/month 300.00 300.00 300.00 300.00
Sub-Total 374 374 374 374

2,296 2,553 2,810 3,068

TOTAL

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5.5.3 Over heads

In the expenses under this title have been included land and building taxes, buildings, vehicles as

well as machinery and equipment insurance, vehicles annual inspection; postage, telephone and e.

mail, stationery and office supplies; printing and copying; audit fee; cash indemnity etc. The

overhead costs and divided in to direct overheads and administration overheads.

Table 10 Overhead costs

Direct Overhead”000”Birr Year 1 Year 2 Year 3 Year 4

Annual land lease Payment 2,231 2,231 2,231 2,231
Insurance
Building and Civil works 0.10% 136 136 136 136
Machinery and Equipment 0.20% 18 18 18 18
Motor vehicle and Truck 1% 30 30 30 30
Vehicles annual inspection and 25,000 Birr per annum per vehicle 25 25 25 25
registration
Work cloth Two times per annum per workers at
1,000 Birr 42 42 42 42
Cleaning and sanitation An estimate of 300 Birr/day 78.00 78.00 78.00 78.00
Sub Total
2,560 2,560 2,560 2,560
Administration Overhead “000’
Birr
Audit fee 40,000 Birr per annum 40.00 40.00 40.00 40.00
Office cleaning and sanitation 2,000 Birr per month 24.00 24.00 24.00 24.00
Stationery and office supplies 2,000 Birr per month 20.00 20.00 20.00 20.00
Printing and Copy 2,000 Birr per month 24.00 24.00 24.00 24.00
Sub Total 108.00 108.00 108.00 108.00
2,668 2,668 2,668 2,668
GRAND TOTAL

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5.5.4 Financial costs

As it has been outlined earlier under” project Financing” the current Development Bank of

Ethiopia credit terms and conditions for newly establishing projects have been used to compute

the financial costs, estimated to be incurred in connection with that of the total investment costs

assumed to be covered through loan financing. The amount of the loan capital to be obtained

and the financial costs to be incurred thereof have been determined depending on the amount of

fixed investment cost and pre-production expenses.

5.5.5 Depreciation

Table 11 Depreciation in Birr"000"

Period Start-up
Capacity utilization 70 % 80 % 90 % 100 %
Project year 1 2 3 4
Item description Original Value
6,820 6,820 6,820 6,820
Structure and civil works 136,400,000.00 5% of original value
1,345 1,345 1,345 1,345
Machinery and equipment 8,965,000.00 15 % of original value

Transformer 2,000,000.00 15 % of original value 300 300 300 300

450 450 450 450
Motor vehicles and trucks 3,000,000.00 15% of original value

Office equipment and furniture 500,000.00 20 % of original value 100 100 100 100

Pre-production expenses 2,000,000.00 25% of original value 500 500 500 500

Total 9,515 9,515 9,515 9,515

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5.6 Break Even point and ROI

5.6.1 Break Even point (BEP)

Three kinds of break-even point

A. BEP Sales Revenue(BR)

B. BEP production (Volume)

C. BEP Percentage (%)

A. Break-even point(BEP) Sales

To determine BEP Annual Sales, multiply annual sales found in income statement by the

annual fixed cost, and divided by Annual sales less Annual variable cost.

Annual sales x Annual fixed costs

BEP (sales) =
Annual sales−Annual variables costs

Annual sales = 84,000,000 Birr

Annual sales x Annual fixed costs 84,000,000 x 29,709,,000
BEP (sales) = = Annual sales−Annual variables costs = = 84,000,000−21,616,,000

BEP (Sales) = 40,003,142 Birr

Annual fixed costs x 100%

B. BEP percentage =
Annual sales−Annual variables costs

29,709,000 x 100%
= 84,000,000−21,616,,000

= 48%

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5.6.2 Return on investment

Return on investment = Net profit /Total capital requirement

= 116,949,000/174,634,700

= 67%

The return on owners’ investment (ROOI)

= Annual net profit /owners’ investment

= 116,949,000/52,390,410

= 223%

5.7 Project benefits

As it has been stated earlier the project is envisaged to reach full capacity operation four years after

commencement of production activities which are assumed to begin with 70% of the estimated total

capacity.

Thus, according to the computation in Annex Table 14 and Annex Table 16, the net income and cash

flow statements analysis revealed that at full capacity operation the project will generate a total

income (gross revenue) amounting to 116 million Birr per annum. The Net Income Statement shows

a steady growth of gross profit starting from 30 million Birr in year 1 reaching the peak of 72 million

Birr in year 10. In its 10 years of manufacturing activities, the project is expected to generate a total

net profit of 376 Birr and contribute 202 million Birr to the government treasury in form of 35%

income tax.

According to the current investment Law, machinery and equipment are anticipated to be imported

duty- free. The liquidity position of the project is very strong. The corresponding Annex Table 16

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of “Cash Flow Statement” shows the positive cumulative cash balance of Birr 338 million and the

project will not face any cash shortage throughout its production life.

The computation of the pay-back period as depicted in Annex table 21 indicates that the project will

be able to reimburse itself from its net cash-income within five years after commencement of

production activities, the period which is considered to be very good for the project of this nature.

In Annex Table 22 of the Benefit-cost ratio and Net present value (NPV) have been calculated at

17% discount factor (D.F) for 10 years of the project activity. Accordingly, the project has NPV of

184 million Birr at 17%D.F. and the benefit-cost ratio of 1.57 at 17% D.F. These results are most

appreciable, especially, when related to the external capital borrowing interest rate which ranges

from 8.50% to 18.5 % for newly establishing projects.

Break-even point (BEP) have been undertaken the project under study when implemented will have

BEP at about 48 % operation of the estimated full capacity

In addition to this, finally, summary of financial efficiency tests have been conducted in Annex table

20, Accordingly, all efficiency ratios indicated positive trends and consequently, it can be inferred

that the project can operate in the frame work of free market mechanism on commercially and

financially viable basis and is remunerative.

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ANNEXES

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NNEX II

CALCULATION OF ANNUAL PRODUCTION COSTS

Table 12 Annual total production costs”000”

Period Start-up Full capacity

Capacity utilization 70 % 80 % 90 % 100 % 100 %

Project Year 1 2 3 4 5 6 7 8 9 10
Cost category
I. Material input 16,800 19,200 21,600 24,000 24,000 24,000 24,000 24,000 24,000 24,000

II. Labor 3,468 3,468 3,468 3,468 3,468 3,468 3,468 3,468 3,468 3,468
III. Utility 2,296 2,553 2,810 3,068 3,068 3,068 3,068 3,068 3,068 3,068

IV. Repair and Maintenance and spare 2,497 2,497 2,497 2,497 2,497 2,497 2,497 2,497 2,497 2,497
parts (1.5 % of fixed costs)
VI Direct overheads 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560
A. Direct Production costs 27,621 30,278 32,935 35,593 35,593 35,593 35,593 35,593 35,593 35,593
VII. Administration over head 108 108 108 108 108 108 108 108 108 108
VIII. Marketing and Promotional expense 2,520 2,880 3,240 3,600 3,600 3,600 3,600 3,600 3,600 3,600
3 % of sales revenue
B. Operating costs 30,249 33,266 36,283 39,301 39,301 39,301 39,301 39,301 39,301 39,301
Interest 14,058 13,237 12,322 11,302 10,164 8,896 7,482 5,905 4,146 2,186
Depreciation 9,515 9,515 9,515 9,515 9,015 8,915 8,217 6,820 6,820 6,820
C. Total production costs 53,822 56,018 58,120 60,118 58,480 57,112 55,000 52,026 50,267 48,307

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ANNEX IV
CALCULATION OF WORKING CAPITAL REQUIREMENTS

I.Minimum requirement of current assets and liabilities

A. Accounts receivable: 26 days at total production costs minus depreciation and interest
B. Inventory
1. Material inputs: 26 days
2. Spare parts : 90 days
3. Work under process: two days at direct costs
4. Product ready for delivery: 8 days at direct costs plus administration overheads
C. Cash on hand : 360 days
D. Accounts payable 26 days for material inputs and utilities
ii. Working capital requirement
Table 13 Calculation of working capital
Minimum Coeff- Project year
Days of icient Start up Full capacity
coverage of
Cost category turnover
1 2 3 4 5 6 7 8 9 10
I. Current asset
A. A/R 26 10 3,025 3,327 3,628 3,930 3,930 3,930 3,930 3,930 3,930 3,930
B. Inventory
1. Material inputs 26 10 1,680 1,920 2,160 2,400 2,400 2,400 2,400 2,400 2,400 2,400
2. Spare parts 90 4 624 624 624 624 624 624 624 624 624 624
3. Work under process 2 130 - - - - - - - - - -
4. Product ready for delivery 8 32.5 - - - - - - - - - -
C. Cash on hand 90 4 2,732 2,797 2,861 2,925 2,925 2,925 2,925 2,925 2,925 2,925
D. Current assets 8,061 8,667 9,273 9,880 9,880 9,880 9,880 9,880 9,880 9,880
II. Current liabilities 1,910 2,175 2,441 2,707 2,707 2,707 2,707 2,707 2,707 2,707
A. A/p 26 10
III. Working capital
A. Net working capital 6,152 6,492 6,832 7,173 7,173 7,173 7,173 7,173 7,173 7,173
B. Increasing in working capital
6,152 340 340 341 0 0 0 0 0 0

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ANNEX V

PROJECTED SALES REVENUE

Start up Full capacity

Period
U/m Quantity at Unit
Capacity full capacity price 70 % 80 % 90 % 100 %
utilization
Item Product mix
description
1 2 3 4 5 6 7 8 9 10
Project year
Addicts Pcs 4,000 30,000 84,000 96,000 108,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000
GRAND TOTAL 84,000 96,000 108,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000

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ANNEX VI

PROJECTED NET INCOME STATMENT

Table 14 Projected Net income statement "000"

Period Start up Full capacity

Capacity utilization 70 % 80 % 90 % 100 %

Project year 1 2 3 4 5 6 7 8 9 10

Item description
84,000 96,000 108,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000
Product sales revenue

Less total production costs 53,822 56,018 58,120 60,118 58,480 57,112 55,000 52,026 50,267 48,307

Gross profit 30,178 39,982 49,880 59,882 61,520 62,888 65,000 67,974 69,733 71,693

Tax 10,562 13,994 17,458 20,959 21,532 22,011 22,750 23,791 24,407 25,093

Net profit 19,616 25,988 32,422 38,923 39,988 40,877 42,250 44,183 45,326 46,600

Accumulated undistributed
profit 19,616 45,604 78,026 116,949 156,937 197,815 240,065 284,248 329,574 376,175

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ANNEX VII
DEBT SERVICE SCHEDULE AND COMPUTATION
PAYMENT OF EQUAL ANNUAL INSTALLMENTS

Table 15 Debt services schedule and Computation

Item description Project year

1 2 3 4 5 6 7 8 9 10
A. Investment and working capital
1. Investment
2. Increment working capital
Total
B. Loan receipts and balances
1. Loan receipts
2. Outstanding balance at 122,244
end of year 122,244 115,108 107,151 98,279 88,386 77,356 65,059 51,345 36,056 19,008
a. First year loan

Total
A. Debt service
1. First year Loan
a. Interest 14,058 13,237 12,322 11,302 10,164 8,896 7,482 5,905 4,146 2,186
b. Repayment of principal 7,136 7,957 8,872 9,892 11,030 12,298 13,713 15,290 17,048 19,008

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ANNEX VIII
CASH-FLOW STATEMENT
FOR
FINANCIAL PLANING
Table 16 Projected Cash flow statement

Period Start up Full capacity

Capacity utilization 70% 80% 90% 100%
Project year 1 2 3 4 5 6 7 8 9 10

Item description
A. Cash - inflow 260,544 96,606 108,606 120,607 120,000 120,000 120,000 120,000 120,000 120,000
1. Financial resource 176,544
(total) 606 606 607
2. Sales revenue 84,000 96,000 108,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000
B. Cash – outflow 238,549 69,060 75,541 82,061 82,027 82,506 83,246 84,287 84,902 85,588
1. Total assets schedule 176,544
including replacement 606 606 607
2. Operating costs 30,249 33,266 36,283 39,301 39,301 39,301 39,301 39,301 39,301 39,301
3. Debt service (total)
a. Interest 14,058 13,237 12,322 11,302 10,164 8,896 7,482 5,905 4,146 2,186
b. Repayment 7,136 7,957 8,872 9,892 11,030 12,298 13,713 15,290 17,048 19,008
4. Tax 10,562 13,994 17,458 20,959 21,532 22,011 22,750 23,791 24,407 25,093
C. Surplus (Deficit) 21,995 27,546 33,065 38,546 37,973 37,494 36,754 35,713 35,098 34,412
D. Cumulative cash balance 21,995 49,541 82,606 121,152 159,125 196,619 233,373 269,086 304,184 338,596

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ANNEX XII
TOTAL INVESTMENT COSTS
Table 17 Total investment costs”000”

Period Start up Full capacity

Project year 1 2 3 4 5 6 7 8 9 10 11
Investment Category
1. Fixed investment costs
a. Initial fixed investment costs 166,483
b. Replacement
2. Pre-operational capital expenditure 2,000
3. Working capital increase 6,152 340 340 340
Total investment costs 174,635 340 340 340

ANNEX XIII
TOTAL ASSETS

Table 18 Total Assets

Period Start up Full capacity

Project year 1 2 3 4 5 6 7 8 9 10 11 12
Investment Category
1. Fixed investment costs
c. Initial fixed investment costs 166,483
 Cost of land
d. Replacement
2. Pre-operational capital expenditure 2,000
3. Current assets increase 8,061 606 606 607
Total assets 176,544 606 606 607

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ANNEX XIV
SOURCES OF FINANCE
Table 19 Sources of finance

Period Start up Full capacity

Project year 1 2 3 4 5 6 7 8 9 10 Total
Sources of finance
1. Equity capital 52,390 340 340 340
2. Loan capital 122,244
3. Current liabilities 1,910 265 266 266
Total finance 176,544 605 606 606

ANNEX XI
SUMMARY OF FINANCIAL EFFECIENCY TESTS
Table 20 Summary of financial efficiency tests

Project year
Project year 1 2 3 4 5 6 7 8 9 10
Capacity utilization 70% 80% 90% 100%
Financial ratio in %
1. Gross profit : Revenue 36% 42% 46% 50% 51% 52% 54% 57% 58% 60%
2. Net profit : Revenue 23% 27% 30% 32% 33% 34% 35% 37% 38% 39%
3. Net profit : initial investment 11% 15% 18% 22% 23% 23% 24% 25% 26% 27%
4. Net profit : Equity 37% 49% 61% 73% 75% 77% 79% 83% 85% 87%
5. Gross profit : Initial investment 17% 23% 28% 34% 35% 36% 37% 39% 40% 41%
6. Operating costs : Revenue 36% 35% 34% 33% 33% 33% 33% 33% 33% 33%

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ANNEX XV
CALCULATIONS OF PAYBACK PERIOD
Table 21 Calculation of payback period”000”

Amount Paid Back Total

Year Net Profit Depreciation Total investment End of year
1 19,616 9,515 29,131 174,635 -145,504
2 25,988 9,515 35,503 340 -110,341
3 32,422 9,515 41,937 340 -68,744
4 38,923 9,515 48,438 341 -20,647
5 39,988 9,015 49,003 +28,356

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ANNEX XVI
CALCULATIONS OF NET PRESENT VALUE AT 17% D.F.

Table 22 Calculation of NPV at 17% D.F.

Project Gross Present value Project costs

year Revenue 1/(1+i)n At at 17% Total Operating Total Present value
17% investment costs at 17%
1 84,000 0.854701 71,795 174,635 30,249 204,884 175,115
2 96,000 0.730514 70,129 340 33,266 33,606 24,550
3 108,000 0.624371 67,432 340 36,283 36,623 22,866
4 120,000 0.53365 64,038 341 39,301 39,642 21,155
5 120,000 0.456111 54,733 39,301 39,301 17,926
6 120,000 0.389839 46,781 39,301 39,301 15,321
7 120,000 0.333195 39,983 39,301 39,301 13,095
8 120,000 0.284782 34,174 39,301 39,301 11,192
9 120,000 0.243404 29,208 39,301 39,301 9,566
10 120,000 0.208037 24,964 39,301 39,301 8,176
Total 503,238 318,961
A. Benefit- cost ratio At 17% D.F. = 1.57
B. NPV At 17% D.F. = 184,277,000 Birr

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