A

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LOCATED AT ALEMGENA TOWN

Table of Contents

1. PROJECT DESCRIPTION......................................................................................................................................5

1.1 PROJECT LOCATION............................................................................................................................................5

1.2 PROJECT RATIONALE..........................................................................................................................................6

1.3 PROJECT STATUS.................................................................................................................................................6

1.4 PROJECT IMPLEMENTATION SCHEDULE..........................................................................................................7

1.5 BENEFITS OF THE PROJECT................................................................................................................................7

2. PROMOTER’S BACKGROUND..............................................................................................................................8

3. PRODUCT DEFINITION........................................................................................................................................8

4. PROJECT MANAGEMENT AND HUMAN RESOURCE........................................................................................10

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4.1 PROJECT MANAGEMENT....................................................................................................................................10

4.2 HUMAN RESOURCE REQUIREMENT.................................................................................................................10

4.3 TRAINING REQUIREMENT................................................................................................................................11

5 MARKET ANALYSIS............................................................................................................................................12

5.1 WHY AGRO-PROCESSING IS CRITICAL TO THE ETHIOPIAN ECONOMY?..................................................12

5.2 SUPPLY................................................................................................................................................................12

5.3 DEMAND..............................................................................................................................................................15

5.4 DEMAND AND SUPPLY GAP...............................................................................................................................16

5.5 MARKETING STRATEGY.....................................................................................................................................16

5.6 PRICE...................................................................................................................................................................16

6 TECHNICAL STUDIES.........................................................................................................................................19

6.1 RAW MATERIAL AND INPUTS...........................................................................................................................19

6.2 PRODUCTION PROCESS....................................................................................................................................21

6.3 CIVIL WORKS.....................................................................................................................................................23

6.4 PRODUCTION MACHINERY...............................................................................................................................23

6.5 VEHICLES............................................................................................................................................................24

6.6 OFFICE EQUIPMENT AND FURNITURE...........................................................................................................24

6.7 UTILITY SUPPLY.................................................................................................................................................25

6.8 ENVIRONMENTAL IMPACT ASSESSMENT.......................................................................................................26

7 FINANCIAL APPRAISAL.....................................................................................................................................27

7.1 INITIAL INVESTMENT COST.............................................................................................................................27

7.2 FINANCING STRUCTURE...................................................................................................................................27

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7.3 APPLIED FINANCIAL ASSUMPTIONS:.............................................................................................................28

7.4 WORKING CAPITAL...........................................................................................................................................28

7.5 OPERATING COST, VOLUME AND REVENUE..................................................................................................29

7.5.1 OPERATING COST..............................................................................................................................................29

7.5.2 PRODUCTION VOLUME AND REVENUE...........................................................................................................30

7.6 PROJECT PROFITABILITY.................................................................................................................................31

7.7 PROJECT LIQUIDITY AND PAYBACK PERIOD................................................................................................32

7.8 NPV & IRR...........................................................................................................................................................33

7.9 SENSITIVITY TO COST AND REVENUE VARIATIONS....................................................................................34

7.10 DEBT SERVICING SCHEDULE............................................................................................................................35

Executive Summary
The prevailing project is food complex that produces wheat flour and biscuit in an
integrated way. Food processing is among the oldest of Ethiopia’s manufacturing
industries. Currently, the food complex processing industry employed about 26% of all
employees in the manufacturing sector. The food processing industry can be broken into
eight major subsectors: one of these categories is the wheat-based products
manufacturing which is the subject matter of this feasibility study.
The project promoter, with trade name of ‘Rodis Enriched Food processing and flour
mill’ is a sole proprietorship business owned by Ato Sintayehu Tesfaye. The project is
located in Oromia regional state Alemgena-Sebeta town administration on 5,000 square
meters of lease land acquired for 80 years. The promoter has executed 40% of the
construction works required for the factory.

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The project is designed to produce wheat flour and biscuit. The market for all of the
envisaged products in the domestic market shows a consistent increment. The short of
supply as compared to demand forced the country to import each of the products this
project has planned to produce. Therefore, establishment of the food complex not only
helps to contribute to narrow the demand gap but also to lessen the hard currency
required to import the products. The desire to create vertical integration to add more
value to the flour products and the perception of demand gap coupled with the
government’s incentive helped the promoter to enter into the Biscuit manufacturing
business.

The total investment cost required for the project is Birr 87.9 million. It is planned that
40% or Birr 35.00 million is contributed by the promoter and the remaining 60% or Birr
52.92 million would be financed by bank. The investor has already contributed Birr 5.86
million from equity, in the form of factory construction work, lease down payment and
pre-operating expenditure. The Bank financing of Birr 52.92 million is scheduled to be
repaid within 8 years excluding the two years grace period at 9.5% interest rate with
quarter repayment.

Starting with initial capacity of 60% and increment by 5% per year, up to attainable
capacity of 90%, the project would make attractive profit throughout its operational years
and generate positive net cash inflows. Within its assumed 10 years life it would return
more than 53% of IRR and more than Birr 241 million net present value.

Establishment of the food complex factory is a contribution to the country’s real GDP as it
has positive impact in fixed asset generation and output quantity increments. Apart from
creating employment opportunity for the domestic labor, the project would reduce hard
currency outlay.

The realization of the project as ascertained in the financial appraisal result enables the
promoter to generate higher net benefits, employment benefit to domestic labor, indirect
employment for input suppliers, tax revenue benefit and import substitution effect on
saving hard currency. These parameters are basic indications of the projects social
desirability and economic feasibility. Therefore, it is advisable to finance it either with
equity or with debt or in a combination of both.

1. PROJECT DESCRIPTION
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The envisaged project is an integrated manufacturing of food complex. The factory
produces Wheat Flour and Biscuit by processing raw wheat. The installed plant capacity of
wheat flour is 30,000 and Biscuit 3,600 tons per year, respectively. 89% of the wheat flour
manufactured in the factory shall be sold in the local market, while the remaining 11% will
be used for the production of biscuit. The percentage proportion is determined based on
the production capacity of the biscuit production machinery.
1.1 Project Location
The food complex plant is located in Alemgena town. Alemgena is located about 20
Kilometer South West of Addis Ababa on the Main Road from Addis Ababa to Djima. While
selecting location for such food complex factory; availability of raw material, adequate
storage and operation space, water and power supply, market outlet for finished products
and availability of labor are among the major factors to be considered. The town is the
host of other labor-intensive factories due to its preferable attribute and proximity to the
capital Addis Ababa.

1.2 Project Rationale

Food item is a commodity; its demand exists whenever human being exists. The demand
increases as population increases disregarding preference of consumers over the type of
feeds and their catering culture. Wheat flour based products such as biscuit are among the
well-known and commonly available products in the Ethiopian Market.
Food self-sufficiency is one of the prime objectives of the country. Labor intensive agro
processing industries play significant role in absorbing the large labor force and thus
contribute their share to the food self sufficiency move. The Agricultural products like
wheat and the semi processed flour shall be traded in a vertically integrated marketing
methodology in order to ensure better wage to the farmer and more value adding
produces that preferably involve many labor to deploy the cheap labor force of the country
in productive sectors. The industry is a distinct sector of the economy, which makes its
direct contributions to the enhancement of social well being of productive citizens.

Apart from its attractive return, existence of stable demand and employment generation
as well as tax revenue to the government, establishment of such agro processing industry
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is a good opportunity to the grain market stimulation and thus to the framers. It is
rationale, therefore, to involve into an activity that helps to tap the well-known business
opportunity.

1.3 Project Status

The existing investment is begun after signing of the lease contract with Oromiya Regional
Government in the year 2003 E.C aiming to establish Food complex factory. So far the
project owner has invested about Birr 5.8 million on the existing project. Among others,
the following are the major investments made within the project compound.

 Civil Works
40% of the civil works for the factory have been accomplished

 Machinery
All required production machinery is being selected.
 Vehicles, Equipment and Furniture

Vehicles, equipments and furniture are not purchased.

 Raw Materials
The major raw materials are wheat and packaging materials. Communication with
suppliers is underway.

1.4 Project Implementation Schedule

The following chart shows major activities to be done during the implementation period.
Activity   Mar April May June July Aug Sept Oct Nov Dec Jan Feb
ch
2013 2014
Land acquisition Done                        
Document Preparation Done                        

Construction of Factory         
Buildings
Debt Financing  

Import of Machinery   

Purchase of Vehicles &   

Equip
Recruitment,   
Installation and
Commissioning
Operation 
Grace Period One year construction and one year for pre-marketing period total two years

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As indicated above and everything will go per our plan, the factory will be operational in
the month of January, 2014. One of the remaining activities is processing debt financing
from bank to supplement the implementation of the project. Two years grace includes pre-
implementation and pre-marketing period to popularizing the factory’s product to the
public so that higher sales would be achieved.

1.5 Benefits of the Project

The major benefits include net returns on investment, supply of quality products to the
local market and income tax to the government. Establishment of the project is creating
opportunity for productive and unemployed portion of the labor force. Indirect benefits
accrue to the country as a whole in the form of generating potential investment capital
and saving of foreign currency. Experience of this project may be extended to the grain
market by creating market the agricultural produce.

2. PROMOTER’s BACKGROUND
Ato Sintayehu is very experienced business man who has been in business for the last 16
years starting from salesman position at B.S.T Plastic Industry to his current position
general manager and co-owner of sintu trading PLC and Bekalus General Trading PLC.
Sintu Trading PLC has been engaged in importing and distributing plastic raw materials
since 1999EC and Bekalus General Trading PLC has been engaged in manufacturing of
house hold plastic goods since 2001EC. Ato Sintayehu run his business in Merkato and
expanded the size and volume of it to reach the current Sintu Trading PLC and Bekalus
General Trading PLC and also to the captioned Project, RODIS ENRICHED FOOD
PROCESSING AND FLOUR MILL. He is young business man who thoroughly studied all the
end to end production and marketing process and already started implementation of the
project and also has accomplished more than 40% of the building.
3. PRODUCT DEFINITION
Wheat flour

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It is a powder made from the grinding of wheat used for human consumption. More wheat flour is
produced than any other flour. In terms of the parts of the grain (the grass fruit) used in flour—
the endosperm or protein/starchy part, the germ or protein/fat/vitamin-rich part, and the bran or
fibre part—there are three general types of flours. White flour is made from the endosperm only.
Whole grain or whole meal flour is made from the entire grain, including bran, endosperm and
germ. Germ flour is made from the endosperm and germ, excluding the bran. The project planned
to produce germ flour type.

Biscuits
A small, flat cake that is dry and usually sweet. Biscuit is a family of candy group, which is
largely, consumed by children and teenagers. Biscuits can be savory, sweet, plain-baked,
filled, or coated (or a mixture of several of these options). Some biscuits supply special
dietary needs such as those for high fiber protein or external vitamins. Biscuit also contain
fat and often sugar and are cut or molded into layers and baked rapidly thoroughly. When
they packed with moisture proof material, they can have long shelf life.

4. GTP plan
The agro-processing industry sector is one of the emphases areas of the GTP plan aiming
to increase the capacity utilization of the industries to 90% at the end of the GTP plan
2014/15 from 60% in the year 2009/10.
In achieving this target the government has also set a plan to increase the productivity of
in industrial crop which are the main inputs like wheat to 1,174.70 metric tons in the year
2014/15 from 629.7 metric ton in the year 2009/10 used as a base period. This simply
shows that the project is one of the government emphasis areas to meet the ultimate goal
of food sufficiency; otherwise the GTP plan has left only one and half year period which
may be short as we compared with the project life of 10 years. The following two tables of
extract from the GTP plan portray the above facts.

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5. PROJECT MANAGEMENT AND HUMAN RESOURCE
5.1. Project Management
The technical aspect of Wheat flour and biscuit production is a well-known profession in
the Ethiopian food-processing sector. As a result, qualified professionals are available in
the market hence; all the technical, marketing, finance & Administration and Production
functions are supervised and managed by Ethiopians. The owner is also member of the
top management group of the factory and other qualified professionals assume the
Production, Marketing & Procurement as well as Finance & Administration functions.

The would be organizational structure of the factory is as shown below:-

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 5.2. Human Resource Requirement
A total number of 300 permanent local employees are projected for the managerial,
professional, technical, and non-professional posts of the project. The 20% staff benefit
includes, 8% pension, transportation and other benefits. Monthly and annual salary
expense is Birr 650,400 and Birr 7,804,800, respectively. The detail including the salary
expense is shown in the following table.

No. of
Position posts Monthly Pay Monthly Salary Expense Annual Pay
General Manager 1 10,000 10,000 120,000
Executive Secretary 1 3,000 3,000 36,000
Legal Advisor 1 4,000 4,000 48,000
sub-total 3 17,000 17,000 204,000
Head Finance and Admin. Department 1 8,000 8,000 96,000
Secretary 1 2,500 2,500 30,000
Administration Division 1 5,000 5,000 60,000
Personnel officer 1 3,000 3,000 36,000
Office girl 1 1,000 1,000 12,000
Personnel Clerk 1 1,500 1,500 18,000
General Service Clerk 1 1,500 1,500 18,000
Telephone Operator 1 1,500 1,500 18,000
Drivers 2 2,000 4,000 48,000
Assistant Drivers 2 1,000 2,000 24,000
Guards 6 800 4,800 57,600
Janitors 2 800 1,600 19,200
Gardeners 1 800 800 9,600
Finance Division 1 5,000 5,000 60,000

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 Senior accountant 1 4,000 4,000 48,000
Accountant 3 3,000 9,000 108,000
Data Entry Clerk 1 1,500 1,500 18,000
Casher 2 2,000 4,000 48,000
sub-total 29 44,900 60,700 728,400
Head Marketing and Procurement 1 8,000 8,000 96,000
Procurement & store division 1 5,000 5,000 60,000
Purchaser 1 3,000 3,000 36,000
Store keeper 2 2,000 4,000 48,000
Head Sales division 1 5,000 5,000 60,000
Sales Officers 2 3,000 6,000 72,000
Sales Clerk 2 1,500 3,000 36,000
Invoice clerk 1 1,500 1,500 18,000
sub-total 11 29,000 35,500 426,000
Production and Technique Depar. Head 1 8,000 8,000 96,000
Production Division Head 1 5,000 5,000 60,000
Shift leader 3 4,000 12,000 144,000
Different machines operators 20 2,000 40,000 480,000
Different machines assistant operators 20 1,500 30,000 360,000
Packing supervisors 3 2,500 7,500 90,000
Packing workers 200 1,500 300,000 3,600,000
Quality Controller-chemist 2 3,000 6,000 72,000
Sub-total 250 27,500 408,500 4,902,000
Technical Division Head 1 5,000 5,000 60,000
Mechanical Forman 1 3,500 3,500 42,000
Senior mechanic 1 3,000 3,000 36,000
Mechanic 1 2,500 2,500 30,000
Senior electrician 1 3,000 3,000 36,000
Electrician 1 2,500 2,500 30,000
Tool Keeper 1 800 800 9,600
sub-total 7 20,300 20,300 243,600
Total 300 138,700 542,000 6,504,000
20% benefit 108,400 1,300,800
Grand total 650,400 7,804,800

Training Requirement
Training shall be carried out during plant erection and commissioning by machinery
supplier. The training and erecting period is scheduled to be for 90 days. The cost of
installation and training cost is included in the cost of production machinery.

6. MARKET ANALYSIS
6.1. Why agro-processing is critical to the Ethiopian Economy?
It is obvious that Ethiopia, which depends on agriculture of nearly half of its GDP should
give top priority to the development of its agricultural sector. To this effect, the
government has adopted an Agricultural-Development Led Industrialization (ADLI)
strategy to ensure sustainable agricultural production for food self reliance and promote
industrialization. The rigorous implementation of the ADLI strategy is recognized to result
in surplus production of agricultural products. Rather than exporting surplus primary
products such as cereals, pulses, oilseeds and fresh produce, Ethiopia will increasingly

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realize the benefits of exporting processed foods that add value to primary agricultural
products. Therefore, the prospects for expansion of the food processing sub-sector are
considerable. Food processing factories of cereals, oilseeds, pulses, sugarcane, vegetables,
fruits, meat, dairy products and spices are expected to be established in large numbers. In
all, agro-industry in general and food processing in particular will play an increasingly
important role in the Ethiopian economy.
In order to be competitive in the market, the Ethiopian food processing industry should
increase the degree of transformation of primary agricultural products and improve upon
the quality of food packaging. Therefore, use of modern technology will be very critical
element in food processing and packaging. In this connection, market access,
management knows how and transfer of technology would take up most.

Given the large agricultural resources potential of the country and relatively under
developed status of the manufacturing sector, the Ethiopian Government should as part of
its ADLI strategy, initially focus on the development of the country’s agro-industry,
especially the food processing industry, both for the export and the domestic markets.
The domestic market is important because growth in income of the general population,
combined with increased urbanization, will in time translate into increased domestic
demand for processed foods.

6.2. Supply

The food processing industry in Ethiopia consists of three scale-based classes; the
dominant core, which consists of large-scale manufacturers producing well-known brands
account for a significant share of the market when it comes to packaged foods such as
biscuits and pasta/macaroni. The second & third class is the competitive fringe consisting
of medium and small scale enterprises that collectively account for a larger share of the
market for unbranded, staple (commodity) food items such as flour & bread. The 2012
CSA Manufacturing Business Survey reports the total production value of the food
processing sector to be 2,688,620,795 in 2011- which is about 11.93% of the
manufacturing industry as a whole.

Ethiopian Food Processing Industry

Number of Establishments by Size

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 2007/2008 2008/2009 2009/2010

Sml Med Lg Sml Med Lg Sml Med Lg

Vegetables/ Fruits processing 1 2 9 1 3 9 - 2 8

Vegetable & animal oils/fats 21 5 7 23 8 8 25 3 8

Dairy products - - 4 1 1 3 3 7 25

Mills 24 62 38 30 77 41 34 88 52

Animal Feed 1 2 40 1 1 12 2 2 3

Bakery 114 66 6 119 70 52 92 49 58

Sugar & Confectionery 11 4 6 6 9 6 5 9 7

Pasta & Macaroni 2 2 7 3 1 8 1 3 12

unclassified 5 4 5 4 3 12 3 1 9

Total 179 147 122 188 173 151 165 164 182

Source: CSA Manufacturing Industry Report 2011

The wheat flour and Biscuit is mainly supplied by the local manufacturers. There are also
some traders that import theses products irregularly from European & Gulf countries. In
the last five years, however, most of the consumption had been supplied by local
producers. On top of that we need not consider or disregard import figures from our
supply projection as our main intention is import substitution. Otherwise it may pose a
question shouldn’t we establish our factory, had the import figures are significantly large?
(we think the answer is no.)
Regarding Investment licenses issued to the Food processing sector, it is observed that
although investment licenses issued to the food processing sector-including beverages
accounted in thousand every year, the proportion of projects that turned out to operation
each year is between 1% and 7%, average 4% during the past 5 years (2007-
2010). According to the CSA’s database the food processing sector constitutes 4% of the
total food and beverages processing. The flour, biscuit, Macaroni and pasta firms
constitute 40% of the food processing firms.
Applying the percentage proportion distribution of firms to the investment licenses issued
(historical trend) results that the number of new projects that would be converted to
operational status is nearly 1 in 2010.
Year and No of Project Compositions 2006 2007 2008 2009 2010

No of Projects in Pre Implementation…………. (1) 1,275 2,094 1,427 1,420

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 No of Projects In Implementation……… ….(2) 57 72 60 37

Projects converted to operational……...……….(3) 96 90 72 16

Total………………………...4 1,521 1,428 2,256 1,559 1,473

Food Licenses (4%)……………………………5 60.84 57.12 90.24 62.36 58.92

Share of flour, biscuit, Macaroni, Pasta Licenses (40%)..6 24 23 36 25 24

Percentage of Conversion to operation.. ¾………7 7% 4% 5% 1%

Share of flour, biscuit Macaroni, Pasta(No.) …...7 x 6 1.54 1.44 1.15 0.26

Hence, more than the supply increment contributed by new entrants, the capacity increment
of the already established firms is significant. The historical production volume trends in ton
and the supply forecast based on the past trend is shown in the following two tables:-
NB. The trend analysis above incorporates estimated no. of firms joining the sector or new
entrants.
Production Volume of the Past ten years Trend:
Year Flour production in Ton Growth rate Biscuit production in ton Growth rate
2000 185,437 - 11,781 -
2001 165,345 -11% 16,607 41%
2002 142,541 -14% 5,378 -68%
2003 136,669 -4% 5,639 5%
2004 155,669 14% 7,361 31%
2005 148,786 -4% 10,115 37%
2006 173,787 17% 10,429 3%
2007 177,263 2% 10,794 3%
2008 180,808 2% 11,172 4%
2009 184,424 2% 11,563 3%
2010 188,113 2% 11,968 4%
Average growth 1% 6%
Source: CSA reports of respective years.

The production capacity of the new entrant firm (nearly one) is unknown. However, on top of
the increase in capacity of the existing firms, prudently we assumed a 1% increase per annum
for each product (flour & Biscuit).

Supply Forecast-in tons

year flour supply Biscuit supply
2011 191,875 12,806
2012 195,713 13,702
2013 199,627 14,661
2014 203,620 15,688
2015 207,692 16,786
2016 211,846 17,961
2017 216,083 19,218
2018 220,404 20,563
2019 224,812 22,003
2020 229,309 23,543
2021 233,895 25,191
2022 238,573 26,954

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 2023 243,344 28,841

Within the projected period, the total supply of wheat flour increases from 199,627
-243,344 tons and biscuit from 14,661 tons to 28,841 tons.

6.3 Demand
In order to forecast the demand for the next ten years, per capita consumption rate is
applied. Other things being constant, apparent consumption/demand is the amount
purchased and consumed. This equals Production + Import-Export. The third variable is
almost zero in Ethiopian case as there is no data on significant exports so far. Therefore,
Demand equals Local Production plus Import. According to the business development
service, Ethiopia’s per capita consumption for Wheat Flour is 3.8 K.g and Biscuit 0.2 K.g.
These rates are considered for the forecast. Population growth of 2.4% plus 6% annual
increase due to the increment of expending power of the population is applied to forecast
the demand as shown below: The population projection figures in this issue are based on
the results of the May 2007, National population and Housing Census of Ethiopia.
Therefore, the projected figures for the year 2012 become 84,320,987.
Year Population per capita flour consumption in ton per capita biscuit consumption in ton
2,012 84,320,987 320,420 16,864
2,013 91,403,950 347,335 18,280
2,014 99,081,882 376,511 19,816
2,015 107,404,760 408,138 21,480
2,016 116,426,760 442,422 23,285
2,017 126,206,607 479,585 25,241
2,018 136,807,962 519,870 27,361
2,019 148,299,831 563,539 29,659
2,020 160,757,017 610,877 32,151
2,021 174,260,607 662,190 34,852
2,022 188,898,497 717,814 37,779
2,023 204,765,971 778,111 40,953

As shown above, the demand volume is expected to grow due to population increment
and per capita income improvement. According to the forecast, within the years from
2013 up to 2023: Demand of wheat flour increases from 347,335- 778,111 tons and
biscuit from 18,280-40,953 tons.

6.4Demand and Supply Gap

The demand-supply variance shows positive demand gap indicating that even after
capacity increment of existing factories, demand for the products would fully be met with
additional imported portion.

Demand Gap
year Flour in ton Biscuit in ton
2,012

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 2,013 147,708 3,619
2,014 172,892 4,129
2,015 200,446 4,695
2,016 230,576 5,325
2,017 263,502 6,023
2,018 299,466 6,798
2,019 338,727 7,657
2,020 381,568 8,609
2,021 428,295 9,661
2,022 479,242 10,825
2,023 534,766 12,112

In aggregate all the products have adequate demand gap that can be supplied by a
number of new entrants including this project.
6.5 Marketing Strategy, segmentation and distribution
The major customers of our products are Wholesalers, Retailers & service-based end-
users. We plan to sell products in bulk primarily to the first segment, wholesalers who in-
turn sells it to retailers in smaller quantities. The second segment comprises of large retail
outlets such as supermarkets who buy bulk quantities directly from the manufacturer and
resell to the consumer.

The third customer segment, service-based end users comprises of institutions &
organizations that source products directly from the manufacturers either as raw materials
or supplies for their businesses/organizations.

The market & distribution system in Ethiopia consists of major wholesalers, regional
wholesale distributors, retailers, middlemen, traders and collectors in a long and complex
value chain. Major Wholesalers in particular have an excessively significant role to play with
the function of bulking; picking up large quantities for smaller wholesalers in regional cities
who in turn distribute it to retailers within the city. Intermediaries such as regional
distributors and middlemen are involved in logistics by covering the difference between the
location of the product and the marketplace where consumers purchase products. Other
traders & entrepreneurs have multiple roles in getting goods to various customer groups.

Major Wholesalers are concentrated in Merkato, the wholesale center of the country. Smaller
wholesalers are scattered throughout regional cities and work in specific territories. The
regional wholesalers seldom buy directly from the manufacturers as they often distribute a
number of goods and merkato is a one-stop destination for all goods distributed in the
Country.

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The smaller wholesalers are highly sensitive to price and local competition so they may or
may not carry the same type of products for a significant period. Thus, Merkato becomes an
ideal destination for the smaller wholesalers as it provides them with variety and information
on price comparisons as well as market intelligence in terms of the volume of a particular
product that has been sold to their competitors. Using this information, the smaller
wholesalers choose the brands and/or product mix they are willing to take back to their
respective markets. This causes consistent fluctuations in sales and production schedule for
a manufacturer if regular market intelligence is not conducted. Large-scale food processors
have an advantage to determine price points if they have penetrated the market well. For
this purpose we will use penetration price strategy.

The development of the retail sector in terms of the emergence organized businesses with
high volume sales and high-traffic locations etc has fostered a growing direct-to-retailer
sales trend amongst manufacturers. Large-scale manufacturers are now distributing their
products to supermarkets and mini-marts through door-to-door sales/delivery route system.
This system allows the manufacturer and retailer to earn a higher margin by cutting out the
middlemen. Despite the benefits its offers, manufacturers generate low volume from the
route sales system since the addressable customer size is very small. The majority of the
Country’s retailers are inaccessible neighborhood kiosks with low-volume sales. Thus, the
Merkato-wholesale distribution system, although very costly to local manufacturers is
assumed to be the most efficient way to deliver products making the intermediary group
‘the primary distribution channel’.

The promoter will use aggressive promotion and product popularization through use of
electronic media especially via TV as visualizing the product will be more convincing. For the
purpose 0.5% of sales are allotted.

6.6.Price
Presently there are different types of flours and biscuits in the market both imported and
locally manufactured. Per our market survey currently, the factory gate price of flour ranges
from birr 900-1,000 and for locally manufactured biscuit it ranges from birr 4,500-5,000 per
quintal or 100 kg, respectively. As a penetration price the average lowest price of birr 900

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and birr 4,500 for flour and biscuit is considered in the analysis. The minimum market price
for the by-product bran is birr 300 per quintal.
6.7Future Prospects

The project has an excellent and promising future since the life style of the consumer base is
changing in its favor. The following factors are expected to contribute positively to the
sustainable growth of the food sector in general.

 Urbanization:-Increased urbanization results in increased consumer demand for

processed food products like wheat flour, bread, pasta &biscuits. Increased number of
catering companies, hotels, universities, and Army consumption is also expected to
increase.
 Urban consumer trends:

 Decrease in consumption of home-produced Injera due to the rising prices of Teff.

 Wheat bread replace traditional bread
 More food & drinks consumed outside from home
 Real income growth due to declining inflation rates
 Increased employment rates due to robust economic activity.

 Other Forces:- Population growth results in overall demand increase

7. TECHNICAL STUDIES
The most important technical considerations for this project is raw materials type and
selection, technology and capacity of plant, power source, water source, production
process and production support facilities like land and factory buildings. Each of them is
discussed in the subsequent parts.

7.1 Raw material and inputs

The major raw material is wheat. Ethiopia is the largest wheat producer in sub-Sahara
Africa. Wheat production is the fourth largest production in Ethiopia with 3,075,640 ton in
area of 1.5 million hectare in the year 2010.

19
 Rank Commodity Production (Int $1000) Production (MT)

1 Roots and Tubers, nes 930197 5439400

2 Maize 528815 3897160

3 Cereals, nes 821423 3207300

4 Wheat 466,686 3,075,640

5 Sorghum 452014 2971270

5

Source: FAOSTAT (2010)

The production is planned to increase through area expansion and yield improvement.
Ethiopia’s wheat production increase in recent years appears to be a combination of
both.

Wheat is the major raw material that accounts for approximately 74% of manufacturing
cost. It is made available locally, primarily through small-holder farms & government
owned farming enterprises. A cluster of privately held, large-scale agricultural enterprises
have been emerging in the past two years bringing the prospect of enhanced quality &
dependable supply into the horizon.

It is not legal for the private sector to import wheat. However, the government supplies
wheat for food manufacturers.

20
Packing materials, flavors & food chemicals such as preservatives, improvers, colors etc.
are not available locally making imports the only option.

Manufacturers can import any raw materials except for wheat and sugar. A discounted
import duty of 10% is afforded to local manufacturers to boost the competitiveness of
local products as opposed to the 30-35%% duty imposed on importers in other sectors
such as traders, service-based enterprises & distributors.

Some raw materials and packaging such as sugar and cartons are normally sourced locally
although frequent shortages and price fluctuations cause a significant instability within the
supply chain.

The other raw material is water. Usually for biscuit about 30% of the dough weight is
constituted by water. However, the water content removed back after the required shape
is formed/Extruded/. The following annual raw material requirement at full capacity is
computed based on the following input output relationship.
Wheat flour
Raw Material Intake Capacity/year Extraction Rate Flour Yield Bran
Raw Wheat 300,000 0.76 226500 39,000
For 500kg biscuit we use the following amount of raw materials.

 flour- 335kg
 v. fat- 67kg
 sugar- 67kg
 ammonium bicarbonate- 4.5kg
 sodium bicarbonate - 4.5kg
 milk powder- 11kg
 flavors- 0.5kg
 glucose- 11kg
 

Input requirement for Biscuit line at full capacity

inputs Qty in kgs prices Total cost
Sugar 482,400 14.5 6,994,800
Fat 482,400 29 13,989,600
Milk powder 79,200 24 1,900,800
Sodium Bicarbonate 32,400 5.76 186,624
Ammonium Bicarbonate 32,400 5.24 169,776
Flavors 3,600 244 878,400
liquid glucose 79,200 12.64 1,001,088
total 25,121,088

21
 Packaging Quantity pcs  Cost at full capacity
Wheat Flour Sacks 25 kg (50% of production) 404,760 2,023,800
Wheat Flour Sacks (50kg 50% of production0 202,380 1,011,900
sub-total 607,140 3,035,700
PP Bag for Byproduct 39,000 195,000
Poly Film -Biscuit-in rolls 15,000 150,000.00
Cartoon for Biscuit 1,500,000 15,000,000
sub-total  15,345,000
Total  18,380,700

7.2 Production Process

7.2.1Cleaning
Whet received for milling contains field contamination, which includes plant parts, weed
seeds, stones, and lumps of soil. It may also have extraneous materials like metal
fragments and other grains. Raw wheat stored in bulk store requires regular recycling and
dosing of fumigation tablets. The wheat from the dumping pit, via bucket elevator is fed to
the vibro separator. Materials to be separated fall freely through the inlet onto the coarse
screen of the vibiro separator, which removes coarse impurities as string, straws, and
stones. Fine sieves further remove broken kernels, sands and other fine impurities. Tailing
from sieve layer cleaned water is used at the outlet to separate light particles by an
aspiration channel.
7.2.2 Conditioning
Prior to milling water is added in process known as “tempering”. Hard wheat is normally
brought to 15-16% moisture, soft wheat 13-14% moisture. Tempered wheat is held 18-24
hourse at ambient temperature in conditioning bins. The process toughness the seed
coat /bran/ and softens the starchy endosperm so that an efficient separation of bran and
endosperm can take place.

7.2.3 Milling/Grinding/

The process of wheat milling is a complex procedure of repetitive grinding and sieving.
The grinding process is divided into the break, scratch and reduction operations.
The tempered wheat is grounded on a serious of corrugated break rolls, the objective
being to open up and scrap the wheat kernel to release endosperm from the bran. Each
grinding operation is followed by sifting operation, in which the coarse branny stock from
the sifter is fed on successive break rolls. Each grinding and bolting operation results in
stream of flour of various breaks (1 st, 2nd, etc) that are collected from finest sieves as
22
intermediate granular particles. The final products of wheat flour are ready to go for the
biscuit line and to store.
An average well-matured grain of wheat has 55% endosperm, 13% bran, and 2% germ.
It is the endosperm of the wheat grain that is converted to flour in milling. In theory, it
should be possible to remove or extract approximately 85% of the grains flour, however
other structural features makes it an impossible task in actual fact, the amount of flour
produced may have some amount of bran, while some flour is lost with the bran.
Therefore, the commercial flour may have extraction rate in the ranges of 73%-80%.
Biscuit
Biscuit manufacturing involves mixing of flour and other ingredients into homogenous
dough, forming the dough into a pre-established shape, backing the dough pieces into
biscuit. Cooling the biscuit and packaging it. These processes are performed on artisanal
or industrial scale. The biscuit manufacturing to be employed is fully automatic. Flour from
the silos is pneumatically transported to the mixing unit; the dough from the mixer is then
automatically transferred to the forming unit, from the forming unit to the oven then the
final product through the cooling tunnel to the packing unit. The following chart shows the
major process flow of the products.
Wheat Flour and Biscuit processing flow Chart

7.3 Civil Works

 Land

23
The land at which the food complex plant is located is acquired on lease base from Sebeta
town Administration Office. The lease agreement for 5,000 m 2 was concluded in the 2003
E.C and valid until the year 2083 E.C. i.e. for 80 years. The promoter has to pay Birr 6.5
per meter square or Birr 2,600,000 in total within 40 years payment period. So far he has
paid Birr 319,215 Including 10% down payment.
The project is located at the industrial zone of Sebeta-Alemgena town which is being
selected by the government considering infrastructure, proximity to the market, availability
of manpower, etc. In this case it seems that the decision for site selection is being made
by the government instead of the promoter.
 Building
The factory requires bigger production, raw material and finished products hall. Such store
and other construction works are already started and 40% completed. Among others, the
factory building consists of the following parts.
 Raw material store , Finished goods store, Offices, Two separate dressing rooms
The factory building is estimated to cost total of birr 13,534,233.41, so far the promoter
has made 40% or about birr 5,541,379.

7.4 Production Machinery and lay out

Both the flour and Biscuit processing machinery are already been selected from different
China suppliers; namely HEBEI AFRICA MACHINERY CO.LTD and SHUNDE LIGHT INDUSTRIAL
PRODUCTS COM.LTD, respectively. Among others, the following points are our selection
criteria.
 Lower price
 They supply the complete plant while the others don’t supply the complete plant
 The main parts of the plant are from very popular and reliable suppliers like Siemens
 The type of material from which the machineries made are the best quality
 They have been in the business for the long time and have good reputation.
Moreover they have supplied to many countries including Ethiopia and we have
learnt from their customers that they provide good quality machineries.
 They provide reliable spare parts
 The machineries run by latest technology.

24
The flour making machine has a designed production capacity of 30,000 ton per year while
the Biscuit machine can produce 3600 ton per year assuming 300 working days in a year.
The under shown table portrays the machinery and its associated costs per the proforma
invoice plus transaction costs computed based on Ethiopian investment agency, factor
cost publication of the year 2012 & access capital price data base.
production machinery cost break down
Wheat Flour Machinery Biscuit machinery Total flour & Biscuit
Production Machinery 551,570 587,700 1,139,270
Sea freight 29,200 28,175 57,375
Port clearing & Delivery charge 8,640 7,560 16,200
Installation cost 26,400 18,000 44,400
Total in USD 615,810 641,435 1,257,245
Exchange rate 18.5 18.5 18.5
Sub-total in Birr 11,392,485 11,866,548 23,259,033
Insurance 17,089 17,800 34,889
Inland freight 40,000 35,000 75,000
Bank charge 171,744 178,790 350,534
Ticket and accommodation 370,000 185,000 555,000
Grand Total 11,991,317 12,283,138 24,274,455
 For flour machine-Two expatriate engineers and 2 technicians with monthly salary of USD 2,000
and USD 2,400 per month shall stay in Addis for three months for installation.
 For Biscuit Machine-2 expatriate engineers from Supplier Company with daily rate of USD 100 will
stay for 90 days for installation.
 Round trip air ticket costs birr 25,000 each expatriate. Accommodation and food charge is
estimated to be birr 750 per day.

NB. The production machinery lay out is annexed.

7.5 Vehicles
The total output (flour, biscuit and the by product) at 60% capacity is more than 53 ton
per day. An Isuzu NPR truck can load 3.5 ton at a time. Assuming a single truck can make
two trips per day, the project demands at least 7 trucks. However, with the assumption
that most of the sales will be made at factory gate and the promoter will use some
vehicles on rental basis, it is planned to purchase only two ISUZU trucks. Own vehicles will
be used to reach far areas and address urgent deliveries. The detail type and price of the
vehicles is shown in the table below.
Vehicles
Type quantity Unit/price Total
ISUZU NPR truck model 2012/3.5ton 2 725,000 1,450,000
2% registration fee 29,000
Total 1,479,000

7.6 Office Equipment and Furniture

25
The factory has to be equipped with the necessary office equipment, furniture for the
administrative, and finance staffs as well as for market integration of input supply and
finished product quality control. The details with related costs are shown in the table
below.
Furniture, Generator and Transformer
Description Unit cost/unit Total
Generator, transformer and electric work one each 6,771,119 6,771,119
Dell computers with LCD monitor & Speaker 25 14347.83 358,696
HP laser Jet printer 15 6086.96 91,304
Canon IR 2420 photo copy machine 1 27826.09 27,826
Managerial table-one side arch 5 3302.61 16,513
managerial table-bean type 180x90x75 8 3144.35 25,155
Single Pedestal table 140x80 21 2151.3 45,177
Executive Book shelf 4 4538.26 18,153
Gust chair 12 499.13 5,990
managerial swivel chair 5 2049.57 10,248
managerial swivel chair 8 1763.48 14,108
managerial swivel chair 21 1669.57 35,061
Dixon shelf 3 1466.09 4,398
sub-total 6,839,964 7,423,748
15% VAT 1,113,562
Total 8,537,310

As indicated from the table the project requires total investment of birr 8,537,310 for
furniture, transformer and generator acquisition.
7.7 Utility Supply
 Power Supply

The factory requires total 840KW (for flour mill 290+biscut line 550) power. The electric
installation cost including power transformer is indicated in the table above under part
6.6 supported by valid proforma invoice. The following table shows the computation of
annual power cost to the factory.
POWER KW Annual Consumption at 24 hrs/day, @100% capacity Rate Per Unit Birr
Flour Mill Line 290 2,088,000 0.58 1,211,040
Biscuit Line 550 3,960,000 0.58 2,296,800
3,507,84
Total 840 6,048,000 0

 Water
Water line is not availed to the project as a result estimated cost of birr 3,000 is allotted in
the pre-operating expenditure. For Flour and Biscuit production, water is an essential
input. Including the requirement for human use, the factory’s annual water consumption
reaches 3,000-m3 at birr 3.25/m3 consumption per day.
26
The detail is shown below.

Water m3/DAY Annual Consumption Rate/ m33 total

Flour Mill and biscuit line 10 3,000 3.25 9,750
 Fuel Consumption
Fuel Consumption
KM/day km. distance /litter price Total
200 6 20 400,000
5% oil & Lubricant 20,000
Estimated hours power off fuel consumption liter/hr price Total
2 5 20 60,000
Total 480,000

As indicated above on average each vehicle is assumed to travel 200 km per day and will
travel 6 kilometers per liter of fuel. Price of fuel is birr 20/litter. The annual fuel
consumption for the two trucks will, thus, be birr 400,000. Oil and lubricant expense is
estimated to be 5 % of fuel. Likewise, a stand by generator on average will work for 2
hours per day with 5 litter consumption per hour at birr 20/litter, the annual fuel cost will
be birr 60,000.
 Communication and Stationery
Telecommunication, Internet and fax service in today’s business world have great
importance in exchanging information between raw material suppliers, intermediaries,
consumers and producers. The area is equipped with mobile network, landline, and
internet service. Total cost for communication and stationery is considered 3% of salary
expense.

7.8 Environmental Impact Assessment

The project will not have an adverse impact on the environment as it is not associated
with process that emits hazardous effluents that can potentially endanger the working or
surrounding environment.

27
8. FINANCIAL APPRAISAL
8.1 Initial Investment Cost

The total initial investment cost required for the project is 87.92 million. The items and
cost breakdown is shown in the following table.

Investment Cost Schedule

Description Unit Total Investment cost
Land use tax Advance Payment Birr 319,215
Factory Building Birr 13,853,449
Production Machinery Birr 24,274,455
Vehicles Birr 1,479,000
Generator, transformer and office Equipment Birr 8,537,310
Sub-total Birr 48,463,429
Pre-operating Expenditure(water 3,000) Birr 14,660
Pre operating Interest Birr 10,055,145
Initial Working Capital Birr 29,437,446
Sub Total Birr 39,507,252
Total Birr 87,970,680

NB. Different legal expenses paid plus birr 3,000 water line installation cost to be paid)
(10,180.48+200+105+10+25+360+780+3000).

8.2 Financing Structure

Total Initial Investment

Cost Equity Contribution Debt Finance
A
m
ou
Item Unit Amount % Amount % nt
Land - Payment Birr 319,215 100% 319,215 0% -
Factory Building Birr 13,853,449 40% 5,541,379 60% 8,312,069
Production Machinery Birr 24,274,455 30% 7,282,336 70% 16,992,118
Vehicles Birr 1,479,000 30% 443,700 70% 1,035,300
Generator, transformer and
office Equipment Birr 8,537,310 30% 2,561,193 70% 5,976,117
Sub-total Birr 48,463,429 33% 16,147,824 67% 32,315,604
Pre-operating Expenditure Birr 14,660 100% 14,660 0% -

Pre operating Interest Birr 10,055,145 100% 10,012,679 0% -

Initial Working Capital Birr 29,437,446 30% 8,831,234 70% 20,606,212
Sub Total Birr 39,464,786 48% 18,858,573 52% 20,606,212

Total Birr 87,970,680 40% 35,006,397 60% 52,921,817

28
As indicated in the above table, it is planned that the promoter would contribute 40% of
the total investment cost and the remaining 60% would be financed by debt. Out of the
equity requirement of Birr 35 million, the promoter has so far committed more than birr
5.86 million for construction of building, lease payment and pre-operating expenditures.
The 60% bank financing, which is birr 52.92 million would be payable within 8 years
exclusive of 2 years grace period at quarterly repayments with 9.5% interest rate.

8.3 Applied Financial Assumptions:

1. Project life: Ten operational years excluding implementation period
2. Capacity Utilization Rate: Starts at 60% and increases by 5% every additional
year up to attainable capacity of 90%.
3. Working days per year: 300
4. Number of shifts: at full capacity = 3,
5. Working hours per shift : 8, total working hours per day, 24,
6. Tax holiday period: Nil,
7. Profit tax: 35% of IBIT and 15% VAT on sales.
8. Salvage value: Buildings 50%, Vehicles, Machinery, and Major Equipment, 20%.
9. Recovery rate: Full amount of the ending working capital amount,
10. Cost of Capital for discounting: 9.5%
11. Grace period: 2 years.
12. Financial Expense on debt finance: Fixed 9.5%,
13. Loan Repayment: Principal plus interest is paid per quarter within 8. years,
however, interest alone would be paid during grace period of 2 years,
14. Water average Rate Birr 3.25 Per M3
15. Power: average rate Birr 0.58 per KWH,
16. Stationery and Communication: 3% of salary expense,
17. Marketing and Promotion: 0.5% of sales revenue,
18. Uniform and miscellaneous : Birr 400 per employee/year,
19. Miscellaneous expense birr 20,000 per annum.
20. Salary Expense: Per the schedule shown in item 4.2,
21. Wage: Birr 50 per ton,
22. Depreciation: Buildings 5%, Machinery, Vehicle, Equipment and furniture 20%,
land lease 1% based lease life.
23. Amortization: Pre-operating expense : 20%,
24. Property Insurance premium: would be 1.75 % for the buildings cost and 2.5%
for Machinery and Vehicles,

29
 25. Repair including tier, spare parts, etc : 0.10% of the cost of building,
Machinery, vehicle and equipment for the first 5 years, then will increase by 10%
then after.
26. Lease Fee: Birr 58,500 per year per lease agreement.

8.4 Working Capital

The major costs selected to be financed with debt are only cost of wheat, packaging,
sugar, flavors. Salary, wage, fuel, as well as power and light costs.

As indicated in the table below, the minimum days coverage considered for one turnover is
30-90 days. The working capital amount is determined to be Birr 29.43 million for year
one. The incremental working capital after year 1 due to increase in production capacity
will be financed from the internally generated cash.

WORKING CAPITAL Schedule

Cost Items/Year MDOC Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year-8

Cost of Wheat 60 21,600,000 23,400,000 25,200,000 27,000,000 28,800,000 30,600,000 32,400,000 32,400,000

Packaging 60 2,205,684 2,389,491 2,573,298 2,757,105 2,940,912 3,124,719 3,308,526 3,308,526

Sugar and other
flavors 90* 4,521,796 4,898,612 5,275,428 5,652,245 6,029,061 6,405,877 6,782,694 6,782,694

Power and Light 30 210,470 228,010 245,549 263,088 280,627 298,166 315,706 315,706

Salary and Wage 30 870,696 878,214 885,732 893,250 900,768 908,286 915,804 915,804

Fuel 30 28,800 31,200 33,600 36,000 38,400 40,800 43,200 43,200

Total 29,437,446 31,825,527 34,213,607 36,601,688 38,989,768 41,377,849 43,765,929 43,765,929

Incremental WC 2,388,081 2,388,081 2,388,081 2,388,081 2,388,081 2,388,081 0

*MDOC-minimum days of coverage
** Import of one L/C takes 90 days

8.5 Operating Cost, Volume and Revenue

8.5.1 Operating Cost
The table below shows the factory operating cost before depreciation and interest
expenses under different production capacity. The assumptions for each cost and expense
are indicated in the aforementioned discussion under part 7.3 above.
Operating cost schedule

Capacity Utilization 100.0 60% 65% 70% 75% 80%

Description/Year - Year 1 Year 2 Year 3 Year 4 Year 5

Cost of Wheat Flour 180,000,000 108,000,000 117,000,000 126,000,000 135,000,000 144,000,000

Power and Light 3,507,840 2,104,704 2,280,096 2,455,488 2,630,880 2,806,272

Sugar and Other Flavors 25,121,088 15,072,653 16,328,707 17,584,762 18,840,816 20,096,870

30
 Water 9,750 5,850 6,338 6,825 7,313 7,800

Fuel Cost 480,000 288,000 312,000 336,000 360,000 384,000

Packaging 18,380,700 11,028,420 11,947,455 12,866,490 13,785,525 14,704,560

Salary expense 7,804,800 7,804,800 7,804,800 7,804,800 7,804,800 7,804,800

Wage (Birr 50/tone 1,503,600 902,160 977,340 1,052,520 1,127,700 1,202,880

Property Insurance 328,162 328,162 328,162 328,162 328,162 328,162

Land Lease 58,500 58,500 58,500 58,500 58,500 58,500

Repair & Maintenance 481,442 481,442 481,442 481,442 481,442 481,442

Stationery& Communication 234,144 140,486 152,194 163,901 175,608 187,315

Marketing and Promotion 2,046,092 1,227,655 1,329,959 1,432,264 1,534,569 1,636,873

Auditing fee 20,000 20,000 22,000 24,200 26,620 29,282

Uniform 120,000 120,000 132,000 145,200 159,720 175,692

miscellaneous expense 20,000 12,000 13,000 14,000 15,000 16,000

Operating Cost Before Dep. 240,096,118 147,582,832 159,160,993 170,740,554 182,321,655 193,904,449
Depreciation 9,560,283 9,560,283 9,560,283 9,560,283 9,560,283
Operating Cost Before
Interest 240,096,118 157,143,116 168,721,277 180,300,837 191,881,938 203,464,733
Interest Expense 4,865,016 4,406,882 3,903,651 3,350,883 2,743,701
Total Operating Cost 240,096,118 162,008,132 173,128,159 184,204,488 195,232,821 206,208,433

Cont.

Capacity Utilization 85% 90% 90% 90% 90%

Description/Year Year 6 Year 7 Year-8 Year-9 Year-10

Cost of Wheat Flour 153,000,000 162,000,000 162,000,000 162,000,000 162,000,000

Power and Light 2,981,664 3,157,056 3,157,056 3,157,056 3,157,056

Sugar and Other Flavours 21,352,925 22,608,979 22,608,979 22,608,979 22,608,979

Water 8,288 8,775 8,775 8,775 8,775

Fuel Cost 408,000 432,000 432,000 432,000 432,000

Packaging 15,623,595 16,542,630 16,542,630 16,542,630 16,542,630

Salary expense 7,804,800 7,804,800 7,804,800 7,804,800 7,804,800

Wage (Birr 50/tone 1,278,060 1,353,240 1,353,240 1,353,240 1,353,240

Property Insurance 328,162 328,162 328,162 328,162 328,162

Land Lease 58,500 58,500 58,500 58,500 58,500

Repair & Maintenance 529,586 529,586 529,586 529,586 529,586

Stationery& Communication 199,022 210,730 210,730 210,730 210,730

Marketing and Promotion 1,739,178 1,841,482 1,841,482 1,841,482 1,841,482

Auditing fee 32,210 35,431 38,974 42,872 47,159

Uniform 193,261 212,587 233,846 257,231 282,954

miscellaneous expense 17,000 18,000 18,000 18,000 18,000

Operating Cost Before Dep. 205,537,251 217,123,959 217,148,761 217,176,043 217,206,053

Depreciation 696,663 696,663 696,663 696,663 696,663

Operating Cost Before Interest 206,233,914 217,820,622 217,845,424 217,872,706 217,902,716

Interest Expense 2,076,749 1,344,143 539,421 - -

Total Operating Cost 208,310,663 219,164,765 218,384,845 217,872,706 217,902,716

31
Per the above successive tables, the total annual factory cost is estimated to be Birr 162
million in the initial year and increases to birr 219 million when it operates at attainable
capacity of 90%.

8.5.2 Production Volume and Revenue

 Production Volume: the two-line machinery has an aggregate installed

production capacity of 30,000 tons and 3,600 tons per annum of wheat and biscuit,
respectively.

 Per the table below the flour line will produce two types of flours of (grade 1 & 2
with equal proportion). At full capacity with extraction rate of 76% the annual
production of flour will reach total 226,500 quintals and 39,000 quintal of bran.

 From the total flour production the biscuit line will use 11% or about 24,120 quintals
while the remaining 89% or about 202,380 quintal will be sold to local market. The
flowing table shows the production volume in detail for each of the production
capacity.

Production Schedule In Quintal/100-kg

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
 At Full
Capacity
Product 60% 65% 70% 75% 80% 85% 90%

Production of Wheat Flour Grade 1 113,250 67,950 73,613 79,275 84,938 90,600 96,263 101,925

Production of Wheat Flour Grade 2 113,250 67,950 73,613 79,275 84,938 90,600 96,263 101,925

Total-Flour 226,500 135,900 147,225 158,550 169,875 181,200 192,525 203,850

Flour to the Market (89%) 202,380 121,428 131,547 141,666 151,785 161,904 172,023 182,142

Bran 39,000 23,400 25,350 27,300 29,250 31,200 33,150 35,100

Flour consumed by biscuit use (11%) 24,120 14,472 15,678 16,884 18,090 19,296 20,502 21,708

Production of Biscuits in qtl 36,000 21,600 23,400 25,200 27,000 28,800 30,600 32,400

Sales Revenue:

32
The net revenue of the project’s products starts with Birr 245 million and increases to Birr
368 million when it operates at attainable capacity. The under shown table depicts the
revenue for each year under different capacity.

Revenue Schedule

Description/Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7-10

Capacity Utilization 60% 65% 70% 75% 80% 85% 90%

Flour Sale 109,285,200 118,392,300 127,499,400 136,606,500 145,713,600 154,820,700 163,927,800

Biscuit Sale 97,200,000 105,300,000 113,400,000 121,500,000 129,600,000 137,700,000 145,800,000

Bran Sale 7,020,000 7,605,000 8,190,000 8,775,000 9,360,000 9,945,000 10,530,000

Total Revenue 213,505,200 231,297,300 249,089,400 266,881,500 284,673,600 302,465,700 320,257,800

with VAT 245,530,980 265,991,895 286,452,810 306,913,725 327,374,640 347,835,555 368,296,470

8.6 Project Profitability

The project would be profitable throughout the considered life years. It is expected to
generate from Birr 33 million up to 66 million net profits. The following table shows the
forecasted income statement of the project within its ten operational years.

Projected Income/Loss Statement

Description/Year Year 1 Year 2 Year 3 Year 4 Year 5

2 24
Revenue 13,505,200 231,297,300 9,089,400 266,881,500 284,673,600

1 18
Total Expense Before Interest 57,143,116 168,721,277 0,300,837 191,881,938 203,464,733

68
Gross profit 56,362,084 62,576,023 ,788,563 74,999,562 81,208,867

Interest Expenses 4,865,016 4,406,882 3,903,651 3,350,883 2,743,701

Net Income 51,497,068 58,169,141 64,884,912 71,648,679 78,465,167

Profit Tax 18,016,024 20,351,249 22,701,769 25,069,088 27,454,858

42
Net Income After Tax 33,481,044 37,817,892 ,183,143 46,579,592 51,010,308

33
 Projected Income/Loss Statement –connt.

Description/Year Year 6 Year 7 Year-8 Year-9 Year-10

302,465,70
Revenue 0 320,257,800 320,257,800 320,257,800 320,257,800

206,233,91
Total Expense Before Interest 4 217,820,622 217,845,424 217,872,706 217,902,716

102,437,17 102,412,37 102,385,09 102,355,08

Gross profit 96,231,786 8 6 4 4

Interest Expenses 2,076,749 1,344,143 539,421   -

Net Income 94,155,037 101,093,035 101,872,955 102,385,094 102,355,084

Profit Tax 32,946,313 35,374,612 35,647,584 35,826,833 35,816,329

Net Income After Tax 61,208,724 65,718,423 66,225,371 66,558,261 66,538,755

8.7 Project Liquidity and Payback period

The project would produce positive net cash inflow starting from the first year and
throughout its life. The cumulative net cash inflow for year one and at the end of 10 th year
would be Birr 38 million and 578 million, respectively. The initial investment costs would
be paid back with the gross value of net-cash inflows at the end of 3rd operational year.

Cash Flow Statement For Financial Planning purpose

Description/Year - Year 1 Year 2 Year 3 Year 4 Year 5
33,481,04 37,817,89 42,183,14 46,579,59 51,010,30
Net Income 4 2 3 2 8
Depreciation and
Amortization 9,560,283 9,560,283 9,560,283 9,560,283 9,560,283
35,006,39
Equity 7 - - - - -
52,921,81
Bank Loan 7 - - - - -
Working Capital
Recovery
Salvage Value
Total cash Inflow 87,928,214 43,041,328 47,378,175 51,743,426 56,139,875 60,570,592
87,928,21
Initial Investment Cost 4
Principal Repayment 4,654,017 5,112,150 5,615,382 6,168,150 6,775,332
Incremental working
capital - 2,388,081 2,388,081 2,388,081 2,388,081
Total cash outflow 87,928,214 4,654,017 7,500,231 8,003,462 8,556,231 9,163,413
Net cash 0 38,387,311 39,877,944 43,739,964 47,583,644 51,407,179
Cumulative cash inflow 38,387,311 78,265,255 122,005,219 169,588,864 220,996,043

34
 Cont.
Description/Year Year 6 Year 7 Year-8 Year-9 Year-10
Net Income 61,208,724 65,718,423 66,225,371 66,558,261 66,538,755
Depreciation and
Amortization 696,663 696,663 696,663 696,663 696,663
Equity - - - - -
Bank Loan - - - - -
Working Capital Recovery 43,765,929
Salvage Value 13,784,877
124,786,22
Total cash Inflow 61,905,387 66,415,086 66,922,034 67,254,924 4
Initial Investment Cost
Principal Repayment 7,442,284 8,174,890 8,979,612 - -
Incremental working capital 2,388,081 2,388,081 - - -
Total cash outflow 9,830,365 10,562,970 8,979,612 0 0
124,786,22
Net cash 52,075,022 55,852,115 57,942,422 67,254,924 4
454,120,52 578,906,75
Cumulative cash inflow 273,071,065 328,923,180 386,865,602 6 0

8.8 NPV & IRR

The harmonizing up of the discounted cash inflows at the rate of 9.5% less the original
outlay cost resulted in (NPV) of Birr 241 million. The internal rate of return (IRR) is 53%,
which is a good deal on top of the considered cost of capital.

Cash Flow statement for Discounting

Description/Year y-0 Year 1 Year 2 Year 3 Year 4 Year 5
Net Income 0 33,475,524 37,812,371 42,177,622 46,574,071 51,004,788
Dep. and Amortization 9,568,777 9,568,777 9,568,777 9,568,777 9,568,777
Interest expense 4,865,016 4,406,882 3,903,651 3,350,883 2,743,701
W/Capital Recovery
Salvage Value
Total Cash Inflow 0 47,909,316 51,788,030 55,650,050 59,493,730 63,317,265
Initial Investment Cost 87,970,680
Principal Repayment 0 4,654,017 5,112,150 5,615,382 6,168,150 6,775,332
Incremental working capital - 2,388,081 2,388,081 2,388,081 2,388,081
Total cash outflow 87,970,680 4,654,017 7,500,231 8,003,462 8,556,231 9,163,413
Net cash flow -87,970,680 43,255,299 44,287,799 47,646,588 50,937,500 54,153,852
241,707,72
NPV @ RRR 9.5% 8

IRR 53%

Cash Flow statement for Discounting, cnt.

Description/Year Year 6 Year 7 Year-8 Year-9 Year-10

6 6 66
Net Income 61,208,724 5,718,423 6,225,371 66,558,261 ,538,755

Depreciation and Amortization 696,663 696,663 696,663 696,663 696,663

Interest expense 2,076,749 1,344,143 539,421 - -

43
Working Capital Recovery   - - - ,765,929

Salvage Value   13
35
 - - ,784,877

Total Cash Inflow 63,982,135 67,759,228 67,461,454 67,254,924 124,786,224

Initial Investment Cost          

Principal Repayment 7,442,284 8,174,890 8,979,612 0 0

Incremental working capital 2,388,081 2,388,081 - - -

Total cash outflow 9,830,365 10,562,970 8,979,612 0 0

Net cash flow 54,151,771 57,196,258 58,481,843 67,254,924 124,786,224

8.9 Sensitivity to Cost and Revenue Variations

Four scenarios are tested to assess how the net benefits of the project behave
towards adverse changes each by 10%. That is.

 Revenue decline
 fixed cost increment
 Operating cost increment, and
 Simultaneous increase in investment and operating cost

No. Scenario NPV in millions of IRR in %

Birr
Base 241 53

Decrease in revenue 140 36

Increase in Operating cost 172 42

Increase in fixed investment cost 233 49

Simultaneous increase in investment and operating cost 164 38

Relatively, the project is not sensitive to increments in fixed investment cost but it is
sensitive to revenue and cost, suggesting a parallel decrease in operating cost and
increase in revenue, respectively. In all cases the however, NPV is positive with
minimum IRR 36% which is far from the discount rate of 9.5%.

8.10 Debt Servicing Schedule

The anticipated bank loan would be paid within 8 years excluding 2 years grace
period, at quarterly repayments and 9.5% nominal interest rate per annum. The two
36
 years grace period includes one year construction period per implementation plan
indicated in part_1.4 above and one year pre-marketing period. The schedule is
shown in the following table.

Loan Amortization, Equal Quarterly Repayment

Principal Payments Balance
Principal Interest
Year 0, 24 Months Grace period. 52,921,817 - 10,055,145 52,921,817
52,921,817 1,122,865 1,256,893 51,798,952
51,798,952 1,149,533 1,230,225 50,649,419
50,649,419 1,176,834 1,202,924 49,472,584
49,472,584 1,204,784 1,174,974 48,267,800
Year 1,Sub Total 4,654,017 4,865,016
48,267,800 1,233,398 1,146,360 47,034,402
47,034,402 1,262,691 1,117,067 45,771,711
45,771,711 1,292,680 1,087,078 44,479,031
44,479,031 1,323,381 1,056,377 43,155,650
Year 2,Sub Total 5,112,150 4,406,882
43,155,650 1,354,811 1,024,947 41,800,838
41,800,838 1,386,988 992,770 40,413,850
40,413,850 1,419,929 959,829 38,993,921
38,993,921 1,453,653 926,106 37,540,268
Year 3,Sub Total 5,615,382 3,903,651
37,540,268 1,488,177 891,581 36,052,091
36,052,091 1,523,521 856,237 34,528,570
34,528,570 1,559,705 820,054 32,968,866
32,968,866 1,596,748 783,011 31,372,118
Year 4,Sub Total 6,168,150 3,350,883
31,372,118 1,634,670 745,088 29,737,448
29,737,448 1,673,494 706,264 28,063,954
28,063,954 1,713,239 666,519 26,350,715
26,350,715 1,753,929 625,829 24,596,786
Year 5 Sub Total 6,775,332 2,743,701
24,596,786 1,795,585 584,174 22,801,201
22,801,201 1,838,230 541,529 20,962,972
20,962,972 1,881,888 497,871 19,081,084
19,081,084 1,926,582 453,176 17,154,502
Year 6 Sub Total 7,442,284 2,076,749
17,154,502 1,972,339 407,419 15,182,163
15,182,163 2,019,182 360,576 13,162,981
13,162,981 2,067,137 312,621 11,095,844
11,095,844 2,116,232 263,526 8,979,612
Year 7 Sub Total 8,174,890 1,344,143
8,979,612 2,166,492 213,266 6,813,120
6,813,120 2,217,947 161,812 4,595,173
4,595,173 2,270,623 109,135 2,324,550
2,324,550 2,324,550 55,208 (0)
Year 8 Sub Total 8,979,612 539,421
52,921,817 23,230,445 76,152,262

Depreciation and Amortization

Cost Item Original Cost Rates Applied Year 1-5 Year 6-10
13,853
Building ,449 5% 692,672 692,672

34,290
Machinery, Equipment, Furniture & Vehicles ,765 20% 6,858,153  
31
Land Lease-over lease period of 80 years 9,215 1% 3,990 3,990

10,069
Pre-operating Expenditure ,805 20% 2,013,961  
58,533,
Total 234   9,568,777 696,663

37