Pergamon Plh S0166-4972(97)00045-X

Technovation, 17(11/12) (1997) 715-721 1997 Elsevier Science Ltd All fights reserved. Printed in Great Britain 0166-4972/97 $17.00 + 0.00

Engineeringeconomystudies on the production of non-alcoholic beverages from some tropical crops

M.O. Ilori and I.A. Irefin Technology Planning & Development Unit, Obafemi Awolowo University, Ile-Ife, Nigeria A.A. Adeniyi International Breweries plc, Ilesa, Nigeria

Abstract
An engineering economic assessment was carried out on the production of non-alcoholic beverages from some tropical crops (breadfruit, potato, plantain and sweet cassava). The production had earlier been established in a previous study in our laboratory. A small-scale production plant was proposed for the commercial exploitation of the research results. The facilities for the production technology were identified and their cost estimates were obtained from equipment fabricators and suppliers. The economic study showed positive net present values (NPV) at 75% and 100% capacity utilisation. This indicates that the research result may lead to a successful innovation if appropriate funding, management and business strategy are employed for its exploitation. 1997 Elsevier Science Ltd. All rights reserved.

1. INTRODUCTION
Beverages, especially beer and non-alcoholic drinks, are consumed in large quantities in Nigeria. The country relied on the importation of barley malt for beverage production prior to the 1986 structural adjustment programme (SAP), which placed a ban on this importation and forced the beverage industry to look inward for alternative raw materials. At present the beverage industry, including the breweries, uses

sorghum (malted and unmalted) and/or maize as 100% substitute for beverage production (Ilori, 1991). Other crops which are cheaper sources of carbohydrate such as breadfruit, plantain, potato and sweet cassava were used as partial substitutes for malted sorghum in the production of beverages (Ilori and Irefin, 1996). The SSV3 sorghum variety, acclaimed to be most suitable for beverage production (Ilori, 1991), was used as a source of endogenous enzymes for beverage production.

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M.O. Ilori et aL

The yields of malt drink samples were significantly (p < 0.05) lower than that of the commercial sample used as a reference. However, the original gravity, total sugar and viscosities of the commercial drink were the same as those of the potato- and cassavabased samples, and lower than those of breadfruitand plantain-based drinks. Similarly, sensory evaluation showed no significant difference between the laboratory malt samples (potato- and plantain-based drinks) and the commercial malt drink in terms of flavour. However, the raw flavours of breadfruit and cassava were slightly noticed in their products. All the samples were adjudged acceptable in terms of overall quality. All the panelists who took part in the organoleptic test indicated their willingness to buy the products if all were available in the market (Ilori and Irefin, 1996). There is the need to establish the economic viability of this technically feasible project before committing resources to its commercialisation. Hence this study was designed to accomplish this task.

(A/P, i, n) (DeGarmo et al., 1979; De la Mare, 1990) were obtained from the interest table. A l and G were estimated as $6098.00 and $2439.00 respectively for the plant operating at full capacity.
The market prices of the food crops and other inputs were used to estimate the cost of the raw materials. The number of employees required for the enterprise at various capacity utilisations were evaluated and their wages estimated on the basis of experience, qualifications and the labour market. All estimates were made in the local currency (naira) and then converted to US dollars ($) because of the instability of the naira. At present $1 = 82 naira. Sales of the drinks and the salvage values at the end of the project life will generate revenue for the enterprise. The sales were calculated on the basis of the plants' capacities. The net present value (NPV) model was employed to determine the profitability of the project before tax. The NPV of a series of cash flows refers to the equivalence of a single sum of money to be received or disbursed at t = 0 if all future receipts and disbursements over time are properly discounted to the present time and then summed algebraically. The model is specified (Au and Au, 1983) as:
?l 12

2. ENGINEERING ECONOMICASSESSMENT
The purpose of engineering economic analysis is to establish that a technically feasible project is also economically viable. The result of the analysis plus some other considerations will assist an interested entrepreneur in making a decision whether or not to commit his scarce resources to the project. A small-scale production level was proposed for the commercial manufacture of the malt drinks. The facilities for the process technology were identified and their cost estimates were obtained from equipment fabricators and suppliers. The operating costs (equipment running, maintenance and repairs and labour costs) were estimated. The equipment running cost is made up of energy, lubrication and water expenses. The gradient series model was used to estimate the annual maintenance cost over the life cycle (n) of the project. In the model, the maintenance cost of the microbrewery was assumed to be A~ in the first year and G more dollars for each additional year until the end of the 10th year. The present worth cost (PWc) of maintenance was first estimated and thereafter converted to annual worth cost (AWe), using the expressions PWc = Al(A/P,i,n) + G(P/G,i,n) AWe = PWc(A/P,i,n) where i = the minimum attractive rate of return (MARR) and the factors (P/A, i, n), (P/G, i, n) and

NPV = ~ t=0

Ate(1 + i)

"= ~ A,~(P/F,i,n)
t=0

where A,~ = the net cash flow for project x at year t (t = 0, 1, 2 .... n), i and n are as specified above, and (P/F, i, n) was also obtained from the interest table. The NPV as expressed above is based on the concept of equivalent worth of all the cash flows relative to some base, a beginning point in time, called the present. That is, all cash inflows and outflows are discounted to the base point at an interest rate (i%) which is the MARR (DeGarmo et al., 1979). The MARR is usually chosen to maximise the economic wellbeing of an organisation subject to the following considerations (DeGarmo et al., 1979): the amount of money available for investment, and the source and cost of these funds; the number of good projects available for investment, and the their purpose; the amount of perceived risk that is associated with investment opportunities available to the firm, and the projected cost of administrating the project over a short planning horizon versus a long planning horizon;

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Engineering economy studies on non-alcoholic beverages production

the type of organisation involved (public or competitive industry). Private competitive industries frequently employ the opportunity cost viewpoint towards choosing MARR.

its annual equivalent capital recovery. The capital recovery cost for a project is the equivalent uniform costs of the capital invested, which include depreciation and interest on the invested capital (DeGarmo et al., 1979). The project is economically attractive if AW --> 0.

In this study, the opportunity cost viewpoint was employed to choose the MARR of 15%, which is the present bank savings interest rate. The NPV method has been used in the economic analysis of various engineering and technical projects. Raider et al. (1983) used this method in an economic analysis of using an aeroplane via lease-back, ownershiP or rental arrangement. The cost curves of various alternatives with respect to percentage of business and total use were obtained for comparison. It has also been used to study the economic viability of a radiology department (Sulivan and Thuesab, 1975) and production of ethanol from breadfruit and cassava via plant enzyme and acid hydrolysis (Ilori et al., 1996a). Apart from NPV, the other basic methods of engineering economy commonly used are briefly discussed below.

2.3 Internal rate of return (IRR) method

The IRR method solves for the interest rate that equates the equivalence of cash inflows to the equivalent worth of cash outflows. The equivalent worth may be computed by using any of the three methods described above. Using the present worth formulation, the IRR is the i'% at which n n

Rk(P/F,i'%,k) = ~ Ek(e/F,i'%,k)
k=0 k=0

where Rk = net receipt or savings for the kth year, Ek = net expenditure, including investments, for the kth year, and n = as previously defined. The project in question is acceptable as long as i' -----MARR, otherwise it is not (DeGarmo et al., 1979). This method is the most widely used. The economic feasibility of using sorghum malt for beer brewing without the use of external enzymes has been established using the IRR method (Ilori et al., 1996b). However, the rigour of the computation and the possibility of multiple rates of return are the major pitfalls of this method.

2.1 Net future value (NFV)

The NFV of a time series of cash flows refers to the equivalence of a single sum of money to be received or disbursed at some future time t = n if all receipts and disbursements over time are properly compounded to that future point in time and summed algebraically. For a given series of net cash flows A,.~ for a project x over a planning horizon of n years, and a given value of MARR as previously defined, the net future worth model of the series is given by (Au and Au, 1983):
n n

2.4 Externalrate of ratum (ERR) method

The ERR method takes into account the external interest rate (e%) at which the net cash flows generated by a project over its life can be reinvested outside the firm. In general, all cash outflows are discounted to the present at e% per compounding period while all cash inflows are compounded to a period n at e%. The ERR is then the interest rate that establishes equivalence between the two quantities. Mathematically, ERR is the interest rate (i%) at which n

NFV = ~] A,.~(1 + i)"= ~] A,.~(F/P,i,n) t=0 t=0

The NFV is exactly comparable to NPV except that all cash inflows and outflows are compounded forward to a reference point in time called the future (DeGarmo et al., 1979). The project is worthwhile economically if NFV --> 0

Ek( PI F, e%,k )( F/P,i%,n )

k=0 n

22 Annualworth (AW)
The annual worth of a project is its annual equivalent receipts, minus annual equivalent expenses, less

= ~
k=0

Rk(PIF, e%,n - k)

where Rk = excess of receipt over expenditure in per-

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M.O. Ilori ef al.

iod k, Ek = excess of expenditure over receipt in period k, n = project life, and E = external reinvestment rate per period. The project is acceptable if i% -> MARR. The method, unlike IRR, is easier to solve and is not subject to multiple rates of return (DeGarmo et al., 1979; De la Mare, 1990). Other methods which are commonly applied in engineering economy studies are benefit-cost ratio (ratio of discounted benefits to the discounted cost with reference to the same point in time) and pay back period. NPV is usually preferred by investors because of its easy computation and the pitfalls of other methods (FMI, 1989, Au and Au, 1983).

the temperature is raised to the gelatinisation temperature of the adjunct. A little quantity of the enzyme liquor is added to avoid the formation of lumps. The mash is then cooled down to about 60C, the enzyme liquor in the wort kettle is pumped into it, and mashing processes follow. After complete saccharification, the wort is transferred to the wort kettle for concentration and blending with sugar syrup, caramel and other ingredients to give the malt drink. The malt drink is then sent into the whirlpool, which is an open vessel in which a centrifugal effect is created by the tangential introduction of the liquid into the vessel (for further clarification); the partially clarified malt drink is then transferred to the heat exchanger (for cooling), holding tank, filtration unit, final product tank and finally to the bottling station. The bottling station is proposed to be operated manually. This will involve manual washing of bottles, filling, pasteurising, labelling and crating. Some degree of mechanisation could be introduced to increase efficiency at an additional cost. Most of the facilities will be fabricated locally, and an oil heater is expected to supply heat to the mash tun and wort kettle. The plant has a production capacity of 10 hl per brew, and will optimally produce four brews per week, which will amount to 1920 hl (26 667 crates) per year and generate about $117 073 (9.6 million naira) per annum for the 10-year project life (Table 2). The capital investment ($153 194.44) is made up of pre-production, fabrication and installation expenses. The annual operating cost including labour, maintenance, raw materials and equipment running expenses was estimated as $61 818.75. The raw material requirements for the brewery vary slightly, depending on the type of adjunct used (Table 3). This could be attributed to the variations in the yields of the malt drinks obtained from the adjuncts. The market prices of the raw materials (Table 4) were used in estimating the cost of raw materials for each malt drink type (Table 3). It is also assumed that 0.5% plantain flour will also be used for the production of breadfruit-, cassava- and potato-based drinks to enhance foam formation and stability. The microbrewery will require eight skilled workers (one production manager, one technician and four operators, plus two salesmen) and 23 unskilled workers. Their wages will amount to $730 000 per annum. The equipment running cost, maintenance and sales promotion expenses were estimated as $15477.07, $14351.34 and $7317.07 respectively. Production rates of two and three brews per week (capacities A and B respectively) were also considered, and their annual

3, RESULTS AND DISCUSSION

Table 1 contains the list of facilities and other items required for assembling the malt drink plant at small enterprise level. The process flow diagram is also shown in Fig. 1. The endogenous enzymes in the malted sorghum are extracted in the mash tun after a protein rest and pumped into the wort kettle. The residual malt grits in the mash tun are mixed with water, cooked for 10 min and then cooled down to about 45C by adding a little quantity of cold water. Thereafter, the mash is mixed with the adjunct and
TABLE 1. Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Facilities and civil structures for the microbrewery Description Mash tun and assessories, 10 hi Lanter tun, 12 hl Mash filter Wort kettle, 18 hl Whirlpool and accessories, 12 hl Heat exchanger Holding tank Filtration unit Bottling station Pipework Empty bottles Steeping tank (plastic), 500 ! Cabinet dryer Oil heater pump (temp. control) Fuel tank, 10001 Generator, 100 kV A Borehole Water tank, 10 0001 Grinder Pick-up van Cold room Sorghum germinating room Factory housing/offices Land (4 plots) Sub-total Incidental Total Qty 1 1 1 1 1 1 2 1 1 1000 3 2 1 1 1 1 1 1 1 1 1 Cost (US$) 4 348.78 5 825.61 7 926.83 4 126.83 3 621.95 6 097.56 6 268.29 3 048.78 6 097.56 3 658.54 6304.88 292.68 4 451.22 1 073.17 121.95 14634.15 2 439.02 975.61 18 292.68 3 658.54 3 658.54 2 439.02 18 292.68 4 878.05 10 867.07 543.04 139 160.00

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Engineeringeconomystudies on non-alcoholicbeveragesproducSon

Breadfruit Potato C a s s a v a or Plaintain flour plus Sorghum malt

Brew water

!111111111111111
Mash Filter M a s h Tun Wort Kettle

,)
Whirlpool

Bottling station Filling/ Crowning Pasteurizing Labelling Crating

II!I!!!!ILII co2
Wort

\
Loading KEY ~ Holding Tank Holding Tank Cooling

@
TABLE 2. Cash flow (US$) for the rnicrobrewery Capacity A Investment: Capacity investment Reproduction expenses Sub-total Annual disbursement: Raw materialsa Equipment running cost Maintenance Labour Sales promotion Sub-total Revenue: Sales of malt Salvage value NPV

Motor Pump

[~ r~

Shut-off valve Outlet vavle

Fig. 1. Process flow diagram for beverage production from some tropical crops at small enterprise level.

Capacity B

Capacity C

139 160.00 14 034.44 153 194.44 6 979.48 9 494.63 8 610.80 6 964.30 3 658.54 35 707.75 58 536.59 18 292.68 - 29 193.19

139 160.00 14 034.44 153 194.44 10 469.21 12 381.66 11 481.07 8 571.44 5 487.80 48 391.17 87 804.88 12 195.12 56 099.00

139 160.00 14 034.44 153 194.44 13 958.95 15 477.07 14 351.34 10 714.30 7 317.07 61 818.75 117 073.17 10 975.61 138 703.79

able. However, if the plant is operated at 30 or 40 hl per week (capacities B and C respectively), it will generate positive NPV before tax--an indication that the brewery will make profits at 75 and 100% capacity utilisations. Similarly, production of other malt types (breadfruit-, cassava- and plantain-based beverages) from this plant will also be profitable (Table 5). The Federal Government of Nigeria has put in place a package of incentives to promote the establishment of such enterprises. These incentives include, among others, tax holiday on corporate income. The relief covers a non-renewable period of five years for pioneer businesses and seven years for such businesses located in economically disadvantaged areas. There is also tax relief for research and development (R&D). Up to 140% of expenses are tax deductible on R&D on local raw materials. Where the R&D is long term it will be regarded as capital expenditure and written off against profit. After the holiday, the company will pay corporate tax of 40%. There are also industrial development banks set up at Federal and State levels to offer specialised services such as provision of soft loans and advances to small,

aVaries depending on the malt type (Table 5)

estimated operating costs and revenue are stated in Table 2. The profitability analysis (Table 2) shows negative NPV when the plant is operated at two brews (20 hl) per week. This implies that production at this level, especially for potato-based malt drink, is not profit-

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M.O. Ilori et aL

TABLE 3. Input/Cost

Quantities and costs of annual raw materials required by the microbrewery at full capacity utilisation Beverage type Breadfruit-based 41.92 4.65 12.80 12.58 12 327.00

Potato-based Sorghum/adjunct (tonnes) ~ Sugar (tonnes) Hop pellets (kg) Enzymes (litres) Raw materials costs (US$) 40.86 4.65 12.80 8.18 13 958.95

Cassava-based 41.28 4.76 12.90 16.62 13 461,54

Plantain-based 42.66 4.65 12.90 12.80 20 075.12

~Ratio of sorghum malt to adjunct is 2:3.

TABLE 4.

Market price of the raw materials Cost (US$) 335.40 tonne 182.93 tonne 146.34 tonne 97.56 tonne 243.91 tonne 7.9 kg 16.93 litre

Raw material Malted sorghum Potato Cassava Breadfruit Plantain Sugar Hops pellets enzyme

' J

TABLE 5.

NPV of the various beverages at 100% capacity utilisation NPV 138 703.29 139 692.45 201 705.71 105 078.94

Malt drink type Potato-based Cassava-based Breadfruit-based Plantain-based

medium and large companies in concessionary terms (FMI, 1986).

4. CONCLUSION
This study and the earlier one have confirmed that the production of malt drinks from non-conventional inputs such as sorghum malt, breadfruit, potato and sweet cassava is technically and economically viable. With the incentives highlighted above, availability of funding and application of appropriate management and business strategy, the research results can be translated into a successful innovation.

for capital investment analysis. Allyn and Bacon, Boston, MA. De la Mare, R.F. (1990) Manufacturing Economics. Technological Management Consultants, Bradford. DeGarmo, E.P., Canada, J.R. and Sulivan, W.G. (1979) Engineering Economy, 6th edition. Macmillan, New York. Federal Ministry of Industry (FMI) (1986) Industrial policy of Nigeria. Abuja, Nigeria. Ilori, M. O. (1991) Use of sorghum for beer brewing in Nigeria. Technovation 11, 27-37. Ilori, M.O. and Irefin, I.A. (1996) Development of non-alcoholic beverages from some tropical crops. Submitted for publication to the Master Brewers Association of the Americas (MBAA) - Technical Quarterly. Ilori, M. O., Layokun, S. K., Idowu, A. O. and Solomon, B. O. (1996a) Economics of small-scale ethanol production from breadfruit and cassava via plant enzyme and acid hydrolysis. MBAA Technical Quarterly 33, 39-43. Ilori, M. O., Makinwa, E. A. and Irefin, I. A. (1996b) Indigenous technological capability development in the brewing industry in Nigeria: An engineering economic assessment and policy implications. Food Review International 12, 4. Raider, M. C., Wagner, B. R. and Remer, D. S. (1983) Cost model for using an airplant via lease-back, ownership or rental arrangements---case study. Engineering Economist 28, 101-130. Sulivan, W. C. and Thuesab, G. J. (1975) A cost evaluation model for radiology department. Engineering Economist 27, 95-100.
M . O . Ilori Obtained the degrees of BSc in Chemistry and M S c in Food Science and T e c h n o l o g y in 1979 and 1983 respectively from the University of lfe (now Obafemi A w o l o w o University), Ile-Ife, Nigeria. His P h D in Food T e c h n o l o g y was obtained f r o m the University of Ibadan, Nigeria. He is a Senior Research Fellow and Acting Director o f the T e c h n o l o g y Planning and Development Unit, a postgraduate department which runs M S c and P h D projects in technology management. His research interest is in the

5. ACKNOWLEDGEMENT
The authors are grateful to the International Foundation for Science (IFS), Sweden, for providing the grant for this project.

REFERENCES
Au, T. and Au, T.P. (1983) Engineering economics

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Engineeringeconomystudies on non-alcoholicbeverages produ,:lJon

area of R&D and innovation management, strategic management of technology, and food processing.

I.A. Irefln is a Research Fellow at the Technology Planning and Development Unit of Obafemi Awolowo University, Ile-lfe, Nigeria. He received his BSc in Food Science and Technology from the University of Nigeria, Nsukka, and his MSc in Technology Policy and Planning from Obafemi Awolowo University. In 1982 he joined African Breweries Limited, Ibadan, Nigeria, and rose to the post of Quality Control and Development Manager. Since 1994 he has been with the Technology Planning and Development Unit of Obafemi Awolowo University. His current interests include food policy, application of technology management techniques to food processing and technology, and small enterprise development.

A.A. Adeniyi is a 42-year-old Nigerian who gained his BSc Biochemistry degree at the University of Ile-lfe, Nigeria (now Obafemi Awolowo University) in 1976. He worked briefly as a Food and Drugs Inspecting Officer with the Nigeria Federal Ministry of Health, Food and Drugs Administration between 1977 and 1979 before joining International Breweries, Ilesha, Nigeria, as a trainee brewer. He had undergone p r o - ! fessional brewer's training at Doemen's !!!ii/!! ~ii!i Technikum, Grafelfing, West Germany, in 1982 and 1983, culminating in the Brewmaster's Certificate in December 1987. He occupied various technical management positions at International Breweries and is currently the Assistant General Manager (Technical), a position he has occupied since July 1990. He is presently about to c6mplete an MSc programme in technology management at the Technology Planning and Development Unit, Obafemi Awolowo University.

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