78.

PROFILE ON THE PRODUCTION OF

FIBERGLASS REINFORCED PLASTICS
 78-1

TABLE OF CONTENTS
PAGE

I. SUMMARY 78-2

II. PRODUCT DESCRIPTION & APPLICATION 78-2

III. MARKET STUDY AND PLANT CAPACITY 78-3

A. MARKET STUDY 78-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 78-8

IV. MATERIALS AND INPUTS 78-9

A. RAW & AUXILIARY MATERIALS 78-9
B. UTILITIES 78-9

V. TECHNOLOGY & ENGINEERING 78-10

A. TECHNOLOGY 78-10
B. ENGINEERING 78-11

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 78-15

A. HUMAN RESOURCE REQUIREMENT 78-15
B. TRAINING REQUIREMENT 78-15

VII. FINANCIAL ANLYSIS 78-16

A. TOTAL INITIAL INVESTMENT COST 78-17
B. PRODUCTION COST 78-18
C. FINANCIAL EVALUATION 78-18
D. ECONOMIC AND SOCIAL BENEFITS 78-20
 78-2

I. SUMMARY

This profile envisages the establishment of a plant for the production of fiberglass reinforced
plastics (FRP) with a capacity of 150 tons per annum. Fiberglass reinforced plastics is used in
reservoirs and tanks, pipes and tubes and roof rack.

The demand for FRP is entirely met through import. The present (2012) demand for FRP
reservoirs and tanks and pipes and tubes is estimated at 380 tons and 523 tons, respectively while
for FRP roof racks it is estimated at 6,706 pieces. The demand for FRP reservoirs and tanks and
pipes and tubes and FRP roof racks is projected to reach 611 tons 842 tons 8,559 pieces
respectively by the year 2017 and 985 tons 1,356 tons 10,924 pieces, respectively by the year
2022.

The principal raw materials required by the envisaged plant are polyester resin, fiber glass,
catalyst, and accelerator colors, which have to be imported.

The total investment cost of the project including working capital is estimated at Birr 16.80
million. From the total investment cost the highest share (Birr 11.18 million or 66.54%) is
accounted by fixed investment cost followed by initial working capital (Birr 3.79 million or
22.61%) and pre operation cost (Birr 1.82 million or 10.86%). From the total investment cost
Birr 6.52 million or 38.83% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 17.26% and a net present
value (NPV) of Birr 6.32 million, discounted at 10%.

The project can create employment for 36 persons. The project will create backward linkage
with the agriculture and agro processing sectors and forward linkage with the livestock sector
and also generates income for the Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION & APPLICATION

Fiberglass Reinforced Plastics (FRP) can offer many advantages over other materials. FRP has a
higher strength-to-weight ratio than steel. FRP laminate is a light weight structural material that
 78-3

allows constructing large structures without the use of ribs or supports. Fiberglass duct systems
require fewer hangers and supports than equivalent metal or PVC systems. FRP can also be
designed to withstand impact, abrasion, cold and heat. Moreover, unlike metal, fiberglass
reinforced plastic is inherently non-conductive. Hence, FRP has many advantages over steel and
plastics such as PVC and PE.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The country’s requirement of fiber reinforced plastic (FRP) tanks, tubes and roof rack is met
through import. However, there is no available data which indicates the quantity of the products
annually imported. Hence in order to estimate the present demand for FRP tanks, tubes and roof
rack the following assumptions are used:

 The majority of large scale water reservoirs and tanks used in the country are made of
steel. However, due to the various advantages of FRP tanks about 10% of the demand for
metallic reservoirs and tanks will be replaced by FRP tanks;
 Currently, the majority of pipes and tubes are made of plastic materials. However, due to
the various advantages of FRP pipes and tubes about 10% of the demand for pipes and
tubes will be replaced by FRP pipes and tubes; and
 Since there is no supply data of roof racks the demand for the product is estimated based
on current vehicle fleet size and an estimated replacement rate. Moreover, the majority
of roof racks used in the country are made of metal. However, due to the various
advantages of FRP racks about 10% of the demand for roof racks will be replaced by
FRP roof racks.

Metallic water reservoirs and tanks and plastic pipes are manufactured locally and also imported.
However, there is no available that that indicates the level of local production of metallic water
reservoirs and tanks. Moreover, according to the data source for locally manufactured products
i.e. Central Statistical Agency’s “Report on Large and Medium Scale Manufacturing and
 78-4

Electricity Industries Survey”, local production of plastic tubes and pipes during the period 2002
– 2010 ranges from 64,550 pieces in 2004 to 121,121 pieces in 2009.

However, considering the number of local plastic tube manufacturing plants CSA data on local
production of plastic pipes is found to be highly under estimated.

Hence, the unsatisfied demand for the products i.e. the demand met through import is considered.
Accordingly, import of metallic water reservoirs and tanks and plastic pipes during the period
2002 – 2011 is shown in Table 3.1.

Table 3.1
IMPORT OF WATER RESERVOIRS AND TANKS AND PLASTIC PIPES (TONS)

Metallic
Water Plastic
Reservoirs Pipes and
Year and Tanks Tubes
2002 997 1,535
2003 470 619
2004 726 2,003
2005 686 2,112
2006 2,146 2,522
2007 1,936 3,066
2008 1,725 2,459
2009 2,229 4,773
2010 3,712 3,793
2011 3,550 4,618

Source: -Ethiopian Revenue and Customs Authority.

As can be seen from Table 3.1, during the period 2002-2011, import of metallic water reservoirs
and tanks and plastic pipes and tubes though fluctuates from year to year, a general growth trend
can be observed. For example the average import during the first five years of the data set (2002
– 2006) for metallic water reservoirs and tanks which was 1,005 tons has increased to 2,630
 78-5

during the next five years (2007-2011) average. Duri9ng the same period import of plastic pipes
and tubes has increased from 1,758 tons to 3,742 tons.

During the period under consideration (2002 – 2011), import of metallic water reservoirs and
tanks and plastic pipes and tubes has registered an average annual growth rate of 31% and 32%,
respectively.

For estimating the present unsatisfied demand for metallic water reservoirs and tanks and plastic
pipes and tubes, it is assumed that the growth rate registered in import of the product during the
recent five years (2007-2011) which is 20% and 19%, respectively, will continue at least in the
near future.

Accordingly, by taking the average level of import during the recent three years (2009 -2011) as
a base and applying a growth rate 20% and 19%, the present (2012) unsatisfied demand for
metallic water reservoirs and tanks and plastic pipes and tubes is estimated at 3,796 tons and
5,230 tons respectively.

Moreover, by assuming that 10% of the estimated unsatisfied demand for metallic water
reservoirs and tanks and plastic pipes and tubes will be replaced by FRP products the present
unsatisfied demand for FRP reservoirs and tanks and pipes and tubes is estimated at 380 tons and
523 tons, respectively.

The demand for roof rack depends in the number of vehicles. The total number of inspected and
registered vehicles in the country in 2002 was only 202,462. This number has grown to 319,338
in 2011. During the period 2002 – 2011 the number of operational vehicles has registered an
average annual growth rate of 4.68% (See Table 3.2).
 78-6

Table 3.2
NUMBER OF OPERATIONAL VEHICLES IN ETHIOPIA

Number of
Year Vehicles
2002 202,462
2003 222,000
2004 235,799
2005 249,878
2006 266,196
2007 285,222
2008 303,401
2009 310,012
2010 316,074
2011 319,338
Source: - Road Transport Authority.

For estimating the present number of vehicle in the country, it is assumed that the growth rate
registered in the past will continue at least in the near future. Accordingly, by taking the number
of inspected and registered vehicles in 2011 as a base and applying a growth rate 5%, the present
(2012) number of inspected and registered vehicles is estimated at 335,305.

Moreover assuming that about 20% of the existing vehicles replace their roof racks annually and
of which 10% is accounted by FRP roof racks, the present demand for FRP roof racks is
estimated at 6,706 pieces.

2. Demand Projection

The major end users of metallic water reservoirs and tanks and plastic pipes and tubes are the
manufacturing, agricultural and construction sectors. Hence the demand for the product depends
on the performance of the manufacturing, agricultural and construction sectors.
 78-7

According to the government’s “Growth and Transformation Plan (2011 – 2015)” during the
plan period, the industrial sector, which includes the manufacturing and construction sectors, is
expected to grow at an average annual growth rate of 20%. However, in order to be conservative
a growth rate of 10% which is slightly lower than the anticipated growth rate of GDP during the
Growth and Transformation period (11.4%) is used to project the unsatisfied demand for metallic
water reservoirs and tanks and plastic pipes and tubes.

The future demand for FRP roof racks depends on the number of vehicles. During the period
2002 – 2011 the number of operational vehicles in the country has registered an average annual
growth rate of 4.68%. Hence a 5% growth rate is used to project the demand for FRP roof racks.
Accordingly, using the estimated present unsatisfied demand as a base and applying the above
growth rates the projected unsatisfied demand for the products is shown in Table 3.3.

Table 3.3
PROJECTED UNSATISFIED DEMAND

FRP
Year Reservoirs FRP Pipes FRP Roof
and Tanks And Tubes Rack
(ton) (ton) (pieces)
2013 418 575 7,041
2014 459 633 7,393
2015 505 696 7,763
2016 556 766 8,151
2017 611 842 8,559
2018 673 926 8,987
2019 740 1,019 9,436
2020 814 1,121 9,908
2021 895 1,233 10,403
2022 985 1,356 10,924
2023 1,083 1,492 11,470
2024 1,191 1,641 12,043
2025 1,311 1,805 12,645
 78-8

3. Pricing and distribution

Based on year 2011 CIF value of imported reservoir tanks, pipes and tubes and roof racks and
considering other costs related to import a factory gate price of Birr 138,246 per ton is
recommended for sales revenue projection and financial evaluation.

The products can be distributed through the existing building materials and vehicle spare part
distributors.

B. PLANT CAPACITY AND PRODUCION PROGRAM

1. Plant Capacity

Considering the economic scale of production and available technology relative to the market
demand projection the annual total production capacity of the plant is set to be 150 tone of fiber
reinforced plastic of different items. The envisaged plant will operate in two shifts sixteen hours
per day for three hundred days within a year considering 13 holidays and 52 Sunday per year and
assuming that maintenance activities will be performed during off hours and Sunday

2. Production Program

The workers will take some time until they develop a skill in operation and troubleshooting of
the production process. Accordingly, the envisaged plant will reach its full capacity operation
after 2 years of implementation. During the first and second year it will operate at 75% and 85%
of the installed capacity. The annual production program is shown in Table 3.4.

Table 3.4
ANNUAL PRODUCTION PROGRAM

Sr. Production Year

No. Description 1 2 3
1 Capacity utilization rate (%) 75.00 85.00 100.00

2 FRP products (Tons) 112.50 127.50 150.00

 78-9

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The direct and auxiliary raw materials required by the plan are polyester resin, fiber glass, and
catalyst and accelerator colors. Annual cost of materials is Birr about Birr 14.86 million. All the
raw materials have to be imported. The direct and auxiliary raw materials required at full
capacity utilization and related cost is shown in Table 4.1.

Table 4.1
ANNUAL RAW MATERIAL REQUIREMENT &COST

Unit Cost Cost ( "000 ) Birr

Sr. Annual
Description UOM ( Birr) Total
No. Consumption
/Ton LC FC ( Birr)
Polyester
1 Resin 150 ton 57,600.00 8,640.00 8,640.00
2 Fiber Glass 60 ton 64,800.00 3,888.00 3,888.00
3 Catalyst 6 ton 54,000.00 324.00 324.00
Accelerator
4 -colors 2 ton 45,000.00 67.50 67.50
Total FOB 12,919.50 12,919.50
5 CIF (15%) 1,937.93 1,937.93
Total Raw Material Annual Cost 1,937.93 12,919.50 14,857.43

B. UTILITES

The annual utilities requirement such as electricity as a source of energy and water as cooling
and cleaning agents are estimated with their associated cost is shown in Table 4.2.
 78-10

Table 4.2
ANNUAL UTILITIES CONSUMPTION & COST

Unit Total Cost

Sr. Annual Cost ("000
No. Description Consumption UoM ( Birr) Birr)
1 Electricity 216,000 kWh 0.58 125.28
2 Water 19,200 m³ 10.00 192.00
Total Annual Cost 317.28

V. TECHNOLOGY AND ENGINNERING

A. TECHNOLOGY

1. Production Process

The most popular method for manufacture of large and complex items is hand layup process. It
requires minimum equipment and inexpensive moulds. Moulds are made of reinforced plastics,
plaster of Paris, wood, etc. only one mould, male or female is used and the articles produced
have finish on the side that comes in contact with the mould. Resins used are of polyester and
epoxy. The molding operation is as follows.

 Application of release agent,

 Gel coat,
 The layup operation,
 Curing and releasing the mould,
 Trimming, and
 Painting.

2. Environmental Impact

The envisaged plant is a manufacturing plant with no chemical or any hazardous waste to the
surrounding environment and process scrapes and wastes will be recycled so that there will not
be additional investment for environmental protection
 78-11

B. ENGINNERING

1. Machinery and Equipment

Total cost of machinery and equipment is Birr 7.5 million. The list of direct and auxiliary
machinery, tools and equipments required for the plant and their estimated cost is shown in Table
5.1.
Table 5.1
LIST OF MACHINERIES, TOOLS ANDEQUIPMENT &COST

Unit Total Cost ( `000 Birr )

Sr. Cost Unit Cost
Description Qty . UOM Total
No. USD ( Birr) LC FC
( Birr)
(FOB)
1 Equipment 1.00 15,000.00 set 270,000.00 270.00 270.00
Lab
2 equipment 1.00 5,000.00 set 90,000.00 90.00 90.00
3 Steel 1.00 54,000.00 set 972,000.00 972.00 972.00
4 Fans 1.00 10,000.00 PCS 180,000.00 180.00 180.00
5 Molds 5.00 25,000.00 set 450,000.00 2,250.00 2,250.00
6 Lathe 1.00 39,450.00 PCS 710,100.00 710.10 710.10
Hydraulic
Press
7 Machine 1.00 40,000.00 set 720,000.00 720.00 720.00
8 Welding 1.00 20,000.00 set 360,000.00 360.00 360.00
Bench
9 Grinder 1.00 1,500.00 set 27,000.00 27.00 27.00
10 Compressor 1.00 300.00 set 5,400.00 5.40 5.40
11 Miscellaneous 1.00 35,000.00 set 630,000.00 630.00 630.00
12 Spare parts ( 5%) 310.73 310.73
Total Fob Price 6,525.23 6,525.23
13 CIF( 15%) 978.78 978.78
Grand Total Machinery Cost 978.78 6,525.23 7,504.01
 78-12

2. Land, Building and Civil Works

The envisaged plant requires total land area of 1,000 meter square, out of which built up are is
500 meter square. At a rate of Birr 5,000 per meter square the total cost of building and civil
work is estimated at Birr 2.5 million.

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

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

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

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

In Addis Ababa, the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the manufacturing
sector, industrial zone preparation is one of the strategic intervention measures adopted by the
City Administration for the promotion of the sector and all manufacturing projects are assumed
to be located in the developed industrial zones.
 78-13

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

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

The new regulation classified the city into three zones. The first Zone is Central Market District
Zone, which is classified in five levels and the floor land lease price ranges from Birr 1,686 to
Birr 894 per m2. The rate for Central Market District Zone will be applicable in most areas of the
city that are considered to be main business areas that entertain high level of business activities.

The second zone, Transitional Zone, will also have five levels and the floor land lease price
ranges from Birr 1,035 to Birr 555 per m2 .This zone includes places that are surrounding the city
and are occupied by mainly residential units and industries.

The last and the third zone, Expansion Zone, is classified into four levels and covers areas that
are considered to be in the outskirts of the city, where the city is expected to expand in the future.
The floor land lease price in the Expansion Zone ranges from Birr 355 to Birr 191 per m2 (see
Table 5.2).
 78-14

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

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

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all
new manufacturing projects will be located in industrial zones located in expansion zones.
Therefore, for the profile a land lease rate of Birr 266 per m2 which is equivalent to the average
floor price of plots located in expansion zone is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period and
extending the lease payment period. The criterions are creation of job opportunity, foreign
exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.
 78-15

Table 5.3
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

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

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

Accordingly, the total land lease cost at a rate of Birr 266 per m2 is estimated at Birr 266,000 of
which 10% or Birr 26,600 will be paid in advance. The remaining Birr 239,400 will be paid in
equal installments with in 28 years i.e. Birr 8,550 annually.

VI. HUMANRESOURCE AND TRAINING REQUIREMENTS

A. HUMANRESOURCE REQUIREMENT

The project requires a total of 36 workers. Annual labor cost is estimated at Birr 799,200. The
list of direct and indirect human resource requirement and their monthly and annual cost is
shown in Table 6.1.

B. TRAINING REQUIREMENT

Due to the less complexity of the production process, individual operators will be trained during
machinery and technology supply together with the transfer of skills and knowledge that will be
held during factory with an estimated training cost of Birr 80,000 so as to minimize the expense
of the investment.
 78-16

Table 6.1
HUMAN RESOURCE REQUIREMENT AND LABOR COST

Sr. Reqd. Monthly Salary Annual salary

Description
No. No. ( Birr) ( `000 Birr )
1 Plant manager 1 6,000.00 72.0
2 Secretary 1 1,500.00 18.0
3 Administration and finance 1 4,500.00 54.0
4 Accountant 1 3,000.00 36.0
5 Mechanic 1 2,200.00 26.4
6 Electrician 1 2,200.00 26.4
7 Operators 16 1,400.00 268.8
8 Production Foreman 1 3,000.00 36.0
9 Clerk 1 800.00 9.6
10 Cashier 1 1,000.00 12.0
11 Assistant operator 6 700.00 50.4
12 Store Keeper 1 1,400.00 16.8
13 Time Keeper 1 1,200.00 14.4
14 Guards 3 700.00 25.2
Sub-total 36 29,600.00 666.0
Employment benefits and
18 allowances 20% 5,920.00 133.2
Total Annual Labor Cost (Direct +Indirect) 799.2

VII. FINANCIAL ANALYSIS

The financial analysis of the fiberglass reinforced plastics project is based on the data presented in
the previous chapters and the following assumptions:-
Construction period 1 year
Source of finance 30 % equity & 70% loan
Tax holidays 5 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Raw material imported 120 days
Work in progress 1 day
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost
 78-17

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 16.80
million (see Table 7.1). From the total investment cost the highest share (Birr 11.18 million or
66.54%) is accounted by fixed investment cost followed by initial working capital ( Birr 3.79
million or 22.61%) and pre operation cost (Birr 1.82 million or 10.86%). From the total
investment cost Birr 6.52 million or 38.83% is required in foreign currency.

Table 7.1

INITIAL INVESTMENT COST (‘000 Birr)

Sr. Local Foreign Total %

No Cost Items Cost Cost Cost Share
1 Fixed investment
1.1 Land Lease 26.60 26.60 0.16
1.2 Building and civil work 2,500.00 2,500.00 14.88
1.3 Machinery and equipment 978.78 6,525.23 7,504.01 44.66
1.4 Vehicles 900.00 900.00 5.36
1.5 Office furniture and equipment 250.00 250.00 1.49
Sub total 4,655.38 6,525.23 11,180.61 66.54
2 Pre operating cost *
2.1 Pre operating cost 725.20 725.20 4.32
2.2 Interest during construction 1,099.30 1,099.30 6.54
Sub total 1,824.50 1,824.50 10.86
3 Working capital ** 3,798.50 3,798.50 22.61
Grand Total 10,278.38 6,525.23 16,803.61 100

* N.B Pre operating cost include project implementation cost such as installation, startup,
commissioning, project engineering, project management etc and capitalized interest during
construction.

** The total working capital required at full capacity operation is Birr 5.05 million. However,
only the initial working capital of Birr 3.79 million during the first year of production is
assumed to be funded through external sources. During the remaining years the working
capital requirement will be financed by funds to be generated internally (for detail working
capital requirement see Appendix 7.A.1).
 78-18

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 19.90 million (see Table
7.2). The cost of raw material account for 74.63% of the production cost. The other major
components of the production cost are depreciation, financial cost and labor which account for
9.80%, 5.31% and 3.35%, respectively. The remaining 6.91% is the share of utility, labor
overhead, repair and maintenance, marketing and distribution and administration cost. For detail
production cost see Appendix 7.A.2.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE)

Items Cost
(`000 Birr) %
Raw Material and Inputs 14,857.43 74.63
Utilities 317.28 1.59
Maintenance and repair 375.20 1.88
Labor direct 666.00 3.35
Labor overheads 133.20 0.67
Administration Costs 200.00 1.00
Land lease cost - -
Cost of marketing and distribution 350.00 1.76
Total Operating Costs 16,899.11 84.89
Depreciation 1,950.84 9.80
Cost of Finance 1,058.08 5.31
Total Production Cost 19,908.03 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through out its
operation life. Annual net profit after tax will grow from Birr 840 thousand to Birr 2.59 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
 78-19

flow amounts to Birr 20.84 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick for
evaluating the financial position of a firm. It is also an indicator for the strength and weakness of
the firm or a project. Using the year-end balance sheet figures and other relevant data, the most
important ratios such as return on sales which is computed by dividing net income by revenue,
return on assets (operating income divided by assets), return on equity (net profit divided by
equity) and return on total investment (net profit plus interest divided by total investment) has
been carried out over the period of the project life and all the results are found to be satisfactory.

3. Break-even Analysis

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

Break -Even Sales Value = Fixed Cost + Financial Cost = Birr 11,392,980
Variable Margin ratio (%)

Break- Even Capacity utilization = Break- even Sales Value X 100 = 55%
Sales revenue

4. Pay-back Period

The pay -back period, also called pay- off period is defined as the period required for recovering
the original investment outlay through the accumulated net cash flows earned by the project.
Accordingly, based on the projected cash flow it is estimated that the project’s initial investment
will be fully recovered within 7 years.
 78-20

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that can be
earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate
of return for an investment is the discount rate that makes the net present value of the
investment's income stream total to zero. It is an indicator of the efficiency or quality of an
investment. A project is a good investment proposition if its IRR is greater than the rate of return
that could be earned by alternate investments or putting the money in a bank account.
Accordingly, the IRR of this project is computed to be 17.26% indicating the viability of the
project.

6. Net Present Value

Net present value (NPV) is defined as the total present (discounted) value of a time series of cash
flows. NPV aggregates cash flows that occur during different periods of time during the life of a
project in to a common measuring unit i.e. present value. It is a standard method for using the
time value of money to appraise long-term projects. NPV is an indicator of how much value an
investment or project adds to the capital invested. In principle, a project is accepted if the NPV is
non-negative. Accordingly, the net present value of the project at 10% discount rate is found to
be Birr 6.32 million which is acceptable. For detail discounted cash flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

The project can create employment for 36 persons. The project will generate Birr 5.73 million in
terms of tax revenue. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports. The project will also create forward
linkage with the construction sub sectors and also generate other income for the Government.
 78-21

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 78-22

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

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

Total inventory 2,785.77 3,157.20 3,714.36 3,714.36 3,714.36 3,714.36 3,714.36 3,714.36 3,714.36 3,714.36

Accounts receivable 1,063.49 1,201.40 1,408.26 1,408.26 1,408.97 1,408.97 1,408.97 1,408.97 1,408.97 1,408.97

Cash-in-hand 14.32 16.23 19.09 19.09 19.21 19.21 19.21 19.21 19.21 19.21

CURRENT ASSETS 3,863.57 4,374.82 5,141.71 5,141.71 5,142.54 5,142.54 5,142.54 5,142.54 5,142.54 5,142.54

Accounts payable 65.08 73.75 86.77 86.77 86.77 86.77 86.77 86.77 86.77 86.77

CURRENT
LIABILITIES 65.08 73.75 86.77 86.77 86.77 86.77 86.77 86.77 86.77 86.77
TOTAL WORKING
CAPITAL 3,798.50 4,301.07 5,054.94 5,054.94 5,055.77 5,055.77 5,055.77 5,055.77 5,055.77 5,055.77
 78-23

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

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

Raw Material and Inputs 11,143 12,629 14,857 14,857 14,857 14,857 14,857 14,857 14,857 14,857

Utilities 238 270 317 317 317 317 317 317 317 317

Maintenance and repair 281 319 375 375 375 375 375 375 375 375

Labour direct 500 566 666 666 666 666 666 666 666 666

Labour overheads 100 113 133 133 133 133 133 133 133 133

Administration Costs 150 170 200 200 200 200 200 200 200 200

Land lease cost 0 0 0 0 9 9 9 9 9 9

Cost of marketing
and distribution 350 350 350 350 350 350 350 350 350 350

Total Operating Costs 12,762 14,417 16,899 16,899 16,908 16,908 16,908 16,908 16,908 16,908

Depreciation 1,951 1,951 1,951 1,951 1,951 125 125 125 125 125

Cost of Finance 0 1,209 1,058 907 756 605 453 302 151 0

Total Production Cost 14,713 17,577 19,908 19,757 19,614 17,637 17,486 17,335 17,184 17,033
 78-24

Appendix 7.A.3
INCOME STATEMENT ( in 000 Birr)

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

Sales revenue 15,553 18,663 20,737 20,737 20,737 20,737 20,737 20,737 20,737 20,737
Less variable costs 12,412 14,067 16,549 16,549 16,549 16,549 16,549 16,549 16,549 16,549

VARIABLE MARGIN 3,141 4,596 4,188 4,188 4,188 4,188 4,188 4,188 4,188 4,188
in % of sales revenue 20.20 24.63 20.20 20.20 20.20 20.20 20.20 20.20 20.20 20.20
Less fixed costs 2,301 2,301 2,301 2,301 2,309 484 484 484 484 484

OPERATIONAL MARGIN 840 2,295 1,887 1,887 1,878 3,704 3,704 3,704 3,704 3,704
in % of sales revenue 5.40 12.30 9.10 9.10 9.06 17.86 17.86 17.86 17.86 17.86
Financial costs 1,209 1,058 907 756 605 453 302 151 0
GROSS PROFIT 840 1,086 829 980 1,123 3,100 3,251 3,402 3,553 3,704
in % of sales revenue 5.40 5.82 4.00 4.73 5.41 14.95 15.68 16.41 17.13 17.86
Income (corporate) tax 0 0 0 294 337 930 975 1,021 1,066 1,111
NET PROFIT 840 1,086 829 686 786 2,170 2,276 2,381 2,487 2,593
in % of sales revenue 5.40 5.82 4.00 3.31 3.79 10.46 10.97 11.48 11.99 12.50
 78-25

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

Year Year Year Year Year Year Year Year Year Year Year
Item 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH
INFLOW 11,906 20,516 18,672 20,750 20,737 20,737 20,737 20,737 20,737 20,737 20,737 7,682
Inflow funds 11,906 4,963 9 13 0 0 0 0 0 0 0 0
Inflow operation 0 15,553 18,663 20,737 20,737 20,737 20,737 20,737 20,737 20,737 20,737 0
Other income 0 0 0 0 0 0 0 0 0 0 0 7,682
TOTAL CASH
OUTFLOW 11,906 17,725 17,649 20,236 19,612 19,513 19,954 19,848 19,742 19,636 18,019 0
Increase in fixed assets 11,906 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 3,864 511 767 0 1 0 0 0 0 0 0
Operating costs 0 12,412 14,067 16,549 16,549 16,558 16,558 16,558 16,558 16,558 16,558 0
Marketing and
Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0
Income tax 0 0 0 0 294 337 930 975 1,021 1,066 1,111 0
Financial costs 0 1,099 1,209 1,058 907 756 605 453 302 151 0 0
Loan repayment 0 0 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512 0 0
SURPLUS (DEFICIT) 0 2,791 1,023 514 1,125 1,224 783 889 995 1,101 2,718 7,682
CUMULATIVE CASH
BALANCE 0 2,791 3,814 4,328 5,454 6,678 7,462 8,351 9,345 10,446 13,164 20,846
 78-26

Appendix 7.A.5
DISCOUNTED CASH FLOW ( in 000 Birr)

Year Year Year Year Year Year Year Year Year Year
Item Year 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH INFLOW 0 15,553 18,663 20,737 20,737 20,737 20,737 20,737 20,737 20,737 20,737 7,682
Inflow operation 0 15,553 18,663 20,737 20,737 20,737 20,737 20,737 20,737 20,737 20,737 0
Other income 0 0 0 0 0 0 0 0 0 0 0 7,682
TOTAL CASH OUTFLOW 15,704 13,264 15,171 16,899 17,194 17,244 17,838 17,883 17,928 17,974 18,019 0
Increase in fixed assets 11,906 0 0 0 0 0 0 0 0 0 0 0
Increase in net working
capital 3,798 503 754 0 1 0 0 0 0 0 0 0
Operating costs 0 12,412 14,067 16,549 16,549 16,558 16,558 16,558 16,558 16,558 16,558 0
Marketing and Distribution
cost 0 350 350 350 350 350 350 350 350 350 350 0
Income (corporate) tax 0 0 0 294 337 930 975 1,021 1,066 1,111 0
NET CASH FLOW -15,704 2,289 3,492 3,838 3,543 3,493 2,899 2,854 2,809 2,763 2,718 7,682
CUMULATIVE NET CASH -
FLOW -15,704 13,416 -9,923 -6,085 -2,542 950 3,850 6,704 9,512 12,276 14,994 22,675
Net present value -15,704 2,081 2,886 2,883 2,420 2,169 1,637 1,465 1,310 1,172 1,048 2,962
- -
Cumulative net present value -15,704 13,624 10,737 -7,854 -5,434 -3,266 -1,629 -164 1,146 2,318 3,366 6,327

NET PRESENT VALUE 6,327

INTERNAL RATE OF
RETURN 17.26%
NORMAL PAYBACK 7 years