10.

PROFILE ON THE PRODUCTION OF

DEHYDRATED AND PRESERVED VEGETABLES AND
FRUITS
 10-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 10-2

II. PRODUCT DESCRIPTION & APPLICATION 10-3

III. MARKET STUDY AND PLANT CAPACITY 10-3

A. MARKET STUDY 10-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 10-6

IV. MATERIALS AND INPUTS 10-7

A. RAW & AUXILIARY MATERIALS 10-7
B. UTILITIES 10-9

V. TECHNOLOGY & ENGINEERING 10-9

A. TECHNOLOGY 10-9
B. ENGINEERING 10-10

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 10-14

A. HUMAN RESOURCE REQUIREMENT 10-14
B. TRAINING REQUIREMENT 10-15

VII. FINANCIAL ANLYSIS 10-16

A. TOTAL INITIAL INVESTMENT COST 10-16
B. PRODUCTION COST 10-17
C. FINANCIAL EVALUATION 10-18
D. ECONOMIC & SOCIAL BENEFITS 10-20
 10-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of dehydrated fruits and
vegetables with a capacity of 1,000 tons per annum. Dehydrated fruits and vegetables are canned
fruits and vegetables the moisture content of which is removed to a level where micro-organisms
may not be able to grow and spoil the products.

The country`s requirement of dehydrated fruits and vegetables is met through import. The
present (2012) demand for dehydrated fruits and vegetables is estimated at 1,571 tons. The
demand for the product is projected to reach 2,530 tons and 3,704 tons by the years 2017 and
2022, respectively.

The principal raw materials required are preserved or fresh fruits and vegetables which are
available locally.

The total investment cost of the project including working capital is estimated at Birr 22.18
million. From the total investment cost the highest share (Birr 14.66 million or 66.12%) is
accounted by fixed investment cost followed by initial working capital (Birr 5.25 million or
23.69%) and pre operation cost (Birr 2.26 million or 10.20%). From the total investment cost
Birr 8.64 million or 38.98% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 32.69%and a net present
value (NPV) of Birr 26.39 million, discounted at 10%.

The project can create employment for 31 persons. The establishment of such factory will have a
foreign exchange saving effect to the country by substituting the current imports. The project
will also create backward linkage with the horticulture farming sub sector and also generates
income for the Government in terms of tax revenue and payroll tax.
 10-iv

II PRODUCT DESCRIPTION AND APPLICATION

Dehydrated and preserved fruits and vegetables are canned fruits and vegetables the moisture
content of which is removed to a level where micro-organisms may not be able to grow and spoil
the products. The fruits and vegetables to be dehydrated and preserved in the envisaged plant
include banana, mangoes, papaya etc. from fruits and tomatoes, onion, potatoes, green pepper,
etc. from vegetables.

The drying process is done in closed chamber by mechanical means under controlled
temperature and humidity conditions so that the products continue to remain attractive,
nutritious, and tasty and conform to sanitary requirements. Dehydrated fruits and vegetables are
further processed and filled into tin - cans which are seamed and sterilized for the purpose of
long term preservation. Canning also adds taste in addition to extending the shelf-life of the
otherwise perishable food products. Canning would, thus, make the food available long time
after it is harvested and become available for export and local market.

Dehydrated and preserved fruits and vegetables are resource based products that will substitute
the import and which have an export potential.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Consumption of fruits and vegetables in Ethiopia is predominantly in fresh form as harvested. In

addition, mostly high income households currently consume imported dehydrated fruits and
vegetables. Since there is no plant engaged in the dehydration of fruits and vegetables in the
country, all of the supply originates from overseas. The common ones are such items as dried
dates, nuts, grapes and pine apples. Table 3.1 shows import of dehydrated fruits and vegetables
for the period covering 2002--2011.
 10-v

Table 3.1
IMPORT OF DEHYDRATED FRUITS AND VEGETABLES (TONS)

Year Quantity

2002 786
2003 354
2004 574
2005 588
2006 602
2007 5,574
2008 2,851
2009 2,288
2010 1,859
2011 567

Source: -Ethiopian Revenues & Customs Authority.

Table 3.1 reveals that import of dried fruits and vegetables in the past ten years has been
fluctuating from year to year. Nevertheless, a general increasing trend is observed during the past
ten years. This can be clearly seen when the data set is analyzed by grouping in to two periods.
During the initial five years of the data set, i.e. 2002--2006, the yearly average level of import
was about 580 tons while it increased to an annual average of about 2,628 tons during the period
2007--2011.

A huge amount of import, which amounts to 5,574 tons, has been registered during year 2007.
Excluding this outlier, the yearly average level of import during the last four years is about 1,891
Tons. Compared to the previous five years (2002--2007) the recent five years annual average is
higher by more than three fold. Hence, by considering the trend of the historical data, the average
of the last three has been taken to fairly reflect as the present effective demand for dried fruits
and vegetables. Accordingly, the present effective demand is set at 1,571 tons.
 10-vi

2. Demand Projection

Demand for dehydrated fruits and vegetable is contingent upon income, price and change in the
consumption habit of the population, particularly the urban population. As income rises and
urbanization increases accompanied by changing consumption habits, a pronounced shift
towards processed and conveniently available foods is bound to occur. In this regard, in major
cities of Ethiopia, there are considerable numbers of inhabitants who have the preference as
well as the ability (purchasing power) for processed food items such as dehydrated fruits and
vegetables. In addition, demand is also expected to be reinforced in the coming years as the
underlying factors have been forecasted to be favorable.

Taking these into consideration, the demand for the product is projected using the average annual
growth rate of import during the period 2002-2011 i.e., 10 % (excluding year 2007 for reason
stated earlier). The forecasted demand is shown in Table 3.2.

Table 3.2
PROJECTED DEMAND FOR DEHYDRATED FRUITS & VEGETABLES (TONS)

Year Projected
Demand
2013 1,728
2014 1,901
2015 2,091
2016 2,300
2017 2,530
2018 2,783
2019 3,062
2020 3,368
2021 3,705
2022 3,704
 10-vii

Demand for dehydrated fruits & vegetables will increase from 1,728 tons in the year 2013 to
2,783 tons 3,705 tons during year 2018 and year 2022, respectively.
3. Pricing and distribution

The market potential for dehydrated fruits and vegetables can only be realized if the price is
reasonable as compared to fresh fruit, and the quality is comparable to imported substitutes.

The current retail selling price of most dehydrated fruits ranges from Birr 30 to Birr 40 per a
pack of 400g. Taking this price as a reference and allowing a 40% margin for distributors and
retailers, an ex-factory price of Birr 24 per a pack of 400g is proposed for the envisaged factory.

An appropriate distribution channel for the product would be one which begins with wholesalers,
who in turn would ensure efficient distribution through the existing retail channels such as
supermarkets and general merchandise shops.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

The capacity of the envisaged plant is proposed to be 1,000 tons of dehydrated and preserved
fruits and vegetables per annum based on the market study and by taking into consideration the
minimum economic scale of production. This capacity is proposed on the basis of a single shift
of 8 hours each per day and 250 working days per annum. Production can be increased upon
requirement by operating the plant in double or triple shifts.

2. Production Program

Considering that the plant requires some time for market penetration and for gaining experience
in plant operation it is planned that the plant will start operation at 75% of its installed capacity
which will grew to 85% during the second year. Full capacity production will be attained in the
third year and onwards. Details of the production program are shown in Table 3.3.
10-viii
 10-ix

Table 3.3

ANNUAL PRODUCTION PROGRAM

Production Year
Sr. Unit of 3rd &
No. Description Measure 1st
2nd
Onwards
Dehydrated and preserved
1 fruits and vegetables ton 750 850 1,000
2 Capacity utilization rate % 75 85 100

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The basic raw materials required for the production of dehydrated and preserved fruits and
vegetables are fresh fruits and vegetables. Proper maturity and the degree of freshness are very
important aspects that determine the quality of the processed products. Thus, the fruits and
vegetables to be dehydrated and preserved have to be fresh and clean.

Out of the total annual production capacity of the envisaged plant, fruits like mangoes, papaya,
banana, grapes, etc, constitute about 60%, and the rest 40% are vegetables like tomato, potatoes,
onions, pepper ,etc.

The potential source of raw materials will be the commercial farms to be established in different
regions of the country including Oromiya as well as small farmers or out growers in the country.
Besides the principal raw materials, additives like sugar and some preservatives such as salt and
vinegar are required for the envisaged plant. The annual raw materials requirement at full
capacity production of the plant along with the estimated costs is given in Table 4.1.

Table 4.1
 10-x

ANNUAL RAW MATERIALS REQUIREMENT AND ESTIMATED COST

Sr. Description Unit of Require Unit

No. Measur d Qty. Price, Cost, ('000 Birr)
e Birr/Uni F.C. L.C. Total
t
1 Fruits ton 706 15,000   10,590 10,590
2 Vegetables (tomato, ton 421 12,000   5,052 5,052
potatoes,
onion, pepper etc.)
3 Salt ton 10 2,500   25 25
4 Sugar ton 50 14,000   700 700
Total   16,367 16,367

The auxiliary materials required for the production of dehydrated and preserved fruits and
vegetables are tin cans of 500ml and 1000ml and carton box. All these auxiliary materials can be
available from local manufacturers. Details of annual auxiliary materials requirement and the
estimated costs at full capacity are shown in Table 4.2.

Table 4.2

ANNUAL AUXILIARY MATERIALS REQUIREMENT AND ESTIMATED COST

Sr. Description Unit of Required Unit Cost,('000 Birr)

No. Measure Qty Price, F.C. L.C. Total
Birr/Unit
1 Tin can, 500 ml pc 1,000,000 2.15 2,150 2,150
2 Tin can, 1,000 pc 500,000 2.50 1,250 1,250
ml
3 Carton box pc 37,500 6.00 225 225
Total 3,625 3,625
 10-xi

B. UTILITIES

The utilities required for the envisaged plant are electric power, water and fuel-oil. Annual
requirement for utilities at full capacity production of the plant and the estimated costs are given
in Table 4.3.
Table 4.3
ANNUAL UTILITIES REQUIREMENT AND ESTIMATED COST

Unit
Sr. Unit of Price, Cost, ('000 Birr)
No Measur Require Birr/Uni F.C
. Description e d Qty. t . L.C. Total
1 Electric power kWh 100,000 0.58   57.78 57.78
2 Water m3 22,500 10.0   225.00 225.00
3 Furnace oil lt 165,000 15.5   2,557.50 2,557.50
Total   2,840.28 2,840.28

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The process of reducing the moisture content of fruits and vegetables to be dried and preserved
by the controlled moisture extraction is called dehydration. There are several commercial
dehydration processes. In most modern dehydrators forced draught is the main principle. To get a
good dehydrated product, forced draught dryers are most effective because the temperature and
humidity can carefully be controlled during the process. Different fruits and vegetables require
different condition of preparation, temperature, humidity and time for dehydration. In general,
the process of dehydration of fruits and vegetables involves sorting, cleaning and washing,
peeling, cutting, drying, and filling into cans, seaming, pasteurization and packing.

2. Environmental Impact
 10-xii

The envisaged plant does not have any adverse impact on the environment. Thus, it is environment
friendly.
B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the production of dehydrated and preserved
fruits and vegetables and the estimated costs are given in Table 5.1. The total cost of machinery
and equipment including one pick – up and one mini – truck is estimated at Birr 10.806 million,
out of which Birr 8.645 million will be in foreign currency.

Table 5.1

LIST OF MACHINERY AND EQUIPMENT AND ESTIMATED COST

Sr. Description Unit of Required Unit Cost, ('000 Birr)

No. Measure Qty. Price, F.C. L.C. Total
Birr/Unit
1 Washing tank set 1 770.00 616.00 154.00 770.00
2 Preparation table with set 1 288.75 231.00 57.75 288.75
aluminum top
3 Empty can conveyor set 1 673.75 539.00 134.75 673.75
4 Table for balance set 1 192.50 154.00 38.50 192.50
5 Peeling machine set 1 962.50 770.00 192.50 962.50
6 Pricking machine set 1 962.50 770.00 192.50 962.50
7 Slicing machine set 1 962.50 770.00 192.50 962.50
8 Cross flow dehydrator set 1 1,925.00 1,540.00 385.00 1,925.00
complete with two
trolleys and 96 trays
9 Bin dryer set 1 770.00 616.00 154.00 770.00
10 Tray set 1 192.50 154.00 38.50 192.50
11 Can assembling table set 1 288.75 231.00 57.75 288.75
12 Steamer set 1 866.25 693.00 173.25 866.25
13 Drainer set 1 673.75 539.00 134.75 673.75
14 Can supplying table set 1 192.50 154.00 38.50 192.50
15 Pick - up set 1 210.00 168.00 42.00 210.00
16 Mini - truck set 1 875.00 700.00 175.00 875.00
Total 8,645.00 2,161.25 10,806.25
 10-xiii

2. Land, Buildings and Civil Works

The total area of land required for the plant is 1,200 square meter out of which 550 square meter
is built-up area which includes processing area, raw material stock area, offices etc. The total
cost of construction at the rate of Birr 4,500 per m2 is estimated at Birr 2.475 million.

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

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

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

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

In Addis Ababa, the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the manufacturing
sector, industrial zone preparation is one of the strategic intervention measures adopted by the
 10-xiv

City Administration for the promotion of the sector and all manufacturing projects are assumed
to be located in the developed industrial zones.

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

Moreover, the Addis Ababa City Administration has recently adopted a new land lease floor
price for plots in the city. The new prices will be used as a benchmark for plots that are going to
be auctioned by the city government or transferred under the new “Urban Lands Lease Holding
Proclamation.”
The new regulation classified the city into three zones. The first Zone is Central Market District
Zone, which is classified in five levels and the floor land lease price ranges from Birr 1,686 to
Birr 894 per m2. The rate for Central Market District Zone will be applicable in most areas of the
city that are considered to be main business areas that entertain high level of business activities.

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

The last and the third zone, Expansion Zone, is classified into four levels and covers areas that
are considered to be in the outskirts of the city, where the city is expected to expand in the future.
The floor land lease price in the Expansion Zone ranges from Birr 355 to Birr 191 per m 2 (see
Table 5.2).
 10-xv

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

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

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all
new manufacturing projects will be located in industrial zones located in expansion zones.
Therefore, for the profile a land lease rate of Birr 266 per m 2, which is equivalent to the average
floor price of plots located in expansion zone is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period and
extending the lease payment period. The criterions are creation of job opportunity, foreign
 10-xvi

exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.

Table 5.3
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS
Payment Down
Grace Completion Paymen
Scored Point Period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

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

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 319,200 of
which 10% or Birr 31,920 will be paid in advance. The remaining Birr 287,280 will be paid in
equal installments with in 28 years i.e. Birr 10,260 annually.

VI. HUMAN RESOURCE AND TRAINING REQUIREMENTS

A. HUMAN RESOURCE REQUIREMENT

The human resource requirement of the envisaged plant is 31 persons. The total annual labor cost
including fringe benefits is estimated at Birr 600,480. Details of human resource requirement
and the estimated annual labor cost including fringe benefits are shown a Table 6.1.
 10-xvii

Table 6.1
HUMAN RESOURCE REQUIREMENT AND LABOR COST

Required No. Salary, Birr

Sr.No. Job Title
of Persons Monthly Annual
1 Plant manager 1 5,000 60,000
2 Secretary 1 1,000 12,000
3 Personnel 1 1,250 15,000
4 Accountant - clerk 2 3,000 36,000
5 Cashier 1 1,500 18,000
6 Salesman /Purchaser 2 3,000 36,000
7 Store keeper 1 1,500 18,000
Production and technical
8 manager 1 4,000 48,000
9 Biologist 1 3,500 42,000
10 Engineer 1 3,500 42,000
11 Quality controller 1 2,500 30,000
12 Mechanic 2 2,500 30,000
13 Electrician 1 1,250 15,000
14 Operator 6 3,600 43,200
15 Production worker 4 1,800 21,600
16 Driver 1 1,000 12,000
17 Guard 4 1,800 21,600
Sub - total 31 41,700 500,400
Employees benefit, 20% of basic salary 8340 100,080
Total   50,040 600,480

B. TRAINING REQUIREMENT

The biologist, engineer, quality controller, 2 mechanics and one electrician should be given a one
week on – the – job training by the advanced technician of the machinery supplier during
erection and commissioning. These in turn have to train the operators for two weeks. The total
cost of training is estimated at Birr 70,000.
 10-xviii

VII. FINANCIAL ANALYSIS

The financial analysis of the dehydrated fruit project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 5 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
22.18million (See Table 7.1). From the total investment cost the highest share (Birr 14.66
million or 66.12%) is accounted by fixed investment cost followed by initial working capital
(Birr 5.25 million or 23.69%) and pre operation cost (Birr 2.26 million or 10.20%). From the
total investment cost Birr 8.64 million or 38.98% is required in foreign currency.
 10-xix

Table 7.1

INITIAL INVESTMENT COST ( ‘000 Birr)

Local Foreign Total %

Sr.No Cost Items Cost Cost Cost Share
1 Fixed investment        
1.1 Land Lease 31.92   31.92 0.14
1.2 Building and civil work 2,475.00   2,475.00 11.16
8,645.0
1.3 Machinery and equipment 2,161.25 0 10,806.25 48.73
1.4 Vehicles 900.00   900.00 4.06
1.5 Office furniture and equipment 450.00   450.00 2.03
  Sub total 6,018.17 8,645.00 14,663.17 66.12
2 Pre operating cost *        
2.1 Pre operating cost 810.30   790.00 3.56
2.2 Interest during construction 1,450.89   1,450.89 6.54
  Sub total 2,261.19   2,261.19 10.20
3 Working capital ** 5,253.55   5,253.55 23.69
  Grand Total 13,532.91 8,645.00 22,177.91 100

* N.B Pre operating cost include project implementation cost such as installation, startup,
commissioning, project engineering, project management etc and capitalized interest during
construction.
** The total working capital required at full capacity operation is Birr 7.04 million. However,
only the initial working capital of Birr 5.25 million during the first year of production is
assumed to be funded through external sources. During the remaining years the working
capital requirement will be financed by funds to be generated internally (for detail working
capital requirement see Appendix 7.A.1).

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 28.76 million (see Table
7.2). The cost of raw material account for 69.50% of the production cost. The other major
components of the production cost are utility, depreciation and financial cost, which account for
9.87%, 9.20% and 4.85%, respectively. The remaining 6.58% is the share of labor, repair and
 10-xx

maintenance, labor overhead and administration cost. For detail production cost see Appendix
7.A.2.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE) (in Birr ‘000’)

Items Cost %
Raw Material and Inputs 19,992.0
0 69.50
Utilities 2,840.2
8 9.87
Maintenance and repair 540.3
1 1.88
Labour direct 500.4
0 1.74
Labour overheads 100.0
8 0.35
Administration Costs 250.0
0 0.87
Land lease cost - -
Cost of marketing and 500.0
distribution 0 1.74
Total Operating Costs 24,723.0
7 85.94
Depreciation 2,647.3
1 9.20
Cost of Finance 1,396.4
8 4.85
Total Production Cost 28,766.8
7 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit throughout its
operation life. Annual net profit after tax will grow from Birr 3.73 million to Birr 6.31 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
 10-xxi

flow amounts to Birr 56.72 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.

2. Ratios

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

3. Break-even Analysis

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

Break -Even Sales Value = Fixed Cost + Financial Cost = Birr 14,238,000
Variable Margin ratio (%)

Break- Even Capacity utilization = Break -even Sales Value X 100 = 32.52%
Sales revenue
4. Pay-back Period

The pay- back period, also called pay – off period is defined as the period required for recovering
the original investment outlay through the accumulated net cash flows earned by the project.
Accordingly, based on the projected cash flow it is estimated that the project’s initial investment
will be fully recovered within 4 years.
 10-xxii

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that can be
earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate
of return for an investment is the discount rate that makes the net present value of the
investment's income stream total to zero. It is an indicator of the efficiency or quality of an
investment. A project is a good investment proposition if its IRR is greater than the rate of return
that could be earned by alternate investments or putting the money in a bank account.
Accordingly, the IRR of this project is computed to be 32.69% indicating the viability of the
project.

6. Net Present Value

Net present value (NPV) is defined as the total present (discounted) value of a time series of cash
flows. NPV aggregates cash flows that occur during different periods of time during the life of a
project in to a common measuring unit i.e. present value. It is a standard method for using the
time value of money to appraise long-term projects. NPV is an indicator of how much value an
investment or project adds to the capital invested. In principle, a project is accepted if the NPV is
non-negative. Accordingly, the net present value of the project at 10% discount rate is found to
be Birr 26.39 million which is acceptable. For detail discounted cash flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

The project can create employment for 31 persons. The project will generate Birr 16.19 million
in terms of tax revenue. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports. The project will also create backward
linkage with the horticulture farming sub sector and also generates income for the Government in
terms of payroll tax.
 10-xxiii

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 10-22

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

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

Total inventory 3,748.50 4,248.30 4,998.00 4,998.00 4,998.00 4,998.00 4,998.00 4,998.00 4,998.00 4,998.00

Accounts receivable 1,555.61 1,757.47 2,060.26 2,060.26 2,061.11 2,061.11 2,061.11 2,061.11 2,061.11 2,061.11

Cash-in-hand 14.49 16.42 19.32 19.32 19.46 19.46 19.46 19.46 19.46 19.46

CURRENT ASSETS 5,318.60 6,022.19 7,077.57 7,077.57 7,078.57 7,078.57 7,078.57 7,078.57 7,078.57 7,078.57

Accounts payable 65.04 73.72 86.73 86.73 86.73 86.73 86.73 86.73 86.73 86.73
CURRENT
LIABILITIES 65.04 73.72 86.73 86.73 86.73 86.73 86.73 86.73 86.73 86.73
TOTAL WORKING
CAPITAL 5,253.55 5,948.47 6,990.85 6,990.85 6,991.84 6,991.84 6,991.84 6,991.84 6,991.84 6,991.84
 10-23

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

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

Raw Material and Inputs 14,994 16,993 19,992 19,992 19,992 19,992 19,992 19,992 19,992 19,992

Utilities 2,130 2,414 2,840 2,840 2,840 2,840 2,840 2,840 2,840 2,840

Maintenance and repair 405 459 540 540 540 540 540 540 540 540

Labour direct 375 425 500 500 500 500 500 500 500 500

Labour overheads 75 85 100 100 100 100 100 100 100 100

Administration Costs 188 213 250 250 250 250 250 250 250 250

Land lease cost 0 0 0 0 10 10 10 10 10 10

Cost of marketing
and distribution 500 500 500 500 500 500 500 500 500 500

Total Operating Costs 18,667 21,090 24,723 24,723 24,733 24,733 24,733 24,733 24,733 24,733

Depreciation 2,647 2,647 2,647 2,647 2,647 144 144 144 144 144

Cost of Finance 0 1,596 1,396 1,197 997 798 598 399 199 0

Total Production Cost 21,315 25,333 28,767 28,567 28,378 25,675 25,476 25,276 25,077 24,877
 10-24

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

Year Year Year Year Year Year Year Year

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

Sales revenue 25,425 28,815 33,900 33,900 33,900 33,900 33,900 33,900 33,900 33,900
Less variable costs 18,167 20,590 24,223 24,223 24,223 24,223 24,223 24,223 24,223 24,223

VARIABLE MARGIN 7,258 8,225 9,677 9,677 9,677 9,677 9,677 9,677 9,677 9,677
in % of sales revenue 28.55 28.55 28.55 28.55 28.55 28.55 28.55 28.55 28.55 28.55
Less fixed costs 3,147 3,147 3,147 3,147 3,158 654 654 654 654 654

OPERATIONAL MARGIN 4,110 5,078 6,530 6,530 6,519 9,023 9,023 9,023 9,023 9,023
in % of sales revenue 16.17 17.62 19.26 19.26 19.23 26.62 26.62 26.62 26.62 26.62
Financial costs   1,596 1,396 1,197 997 798 598 399 199 0
GROSS PROFIT 4,110 3,482 5,133 5,333 5,522 8,225 8,424 8,624 8,823 9,023
in % of sales revenue 16.17 12.08 15.14 15.73 16.29 24.26 24.85 25.44 26.03 26.62
Income (corporate) tax 0 0 0 1,600 1,657 2,467 2,527 2,587 2,647 2,707
NET PROFIT 4,110 3,482 5,133 3,733 3,865 5,757 5,897 6,037 6,176 6,316
in % of sales revenue 16.17 12.08 15.14 11.01 11.40 16.98 17.40 17.81 18.22 18.63

Appendix 7.A.4
 10-25

CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr)

Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Scrap
TOTAL CASH INFLOW 15,473 32,194 28,824 33,913 33,900 33,900 33,900 33,900 33,900 33,900 33,900 9,960
Inflow funds 15,473 6,769 9 13 0 0 0 0 0 0 0 0
Inflow operation 0 25,425 28,815 33,900 33,900 33,900 33,900 33,900 33,900 33,900 33,900 0
Other income 0 0 0 0 0 0 0 0 0 0 0 9,960
TOTAL CASH
OUTFLOW 15,473 25,437 25,384 29,170 29,515 29,383 29,994 29,854 29,714 29,575 27,440 0
Increase in fixed assets 15,473 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 5,319 704 1,055 0 1 0 0 0 0 0 0
Operating costs 0 18,167 20,590 24,223 24,223 24,233 24,233 24,233 24,233 24,233 24,233 0
Marketing and
Distribution cost 0 500 500 500 500 500 500 500 500 500 500 0
Income tax 0 0 0 0 1,600 1,657 2,467 2,527 2,587 2,647 2,707 0
Financial costs 0 1,451 1,596 1,396 1,197 997 798 598 399 199 0 0
Loan repayment 0 0 1,995 1,995 1,995 1,995 1,995 1,995 1,995 1,995 0 0
SURPLUS (DEFICIT) 0 6,758 3,440 4,743 4,385 4,517 3,906 4,046 4,186 4,325 6,460 9,960
CUMULATIVE CASH
BALANCE 0 6,758 10,197 14,940 19,325 23,842 27,748 31,794 35,980 40,305 46,765 56,725

Appendix 7.A.5
DISCOUNTED CASH FLOW ( in 000 Birr)
 10-26

Year Year Year Year Year

Item Year 1 2 Year 3 4 Year 5 6 Year 7 8 Year 9 10 Year 11 Scrap
TOTAL CASH INFLOW 0 25,425 28,815 33,900 33,900 33,900 33,900 33,900 33,900 33,900 33,900 9,960
Inflow operation 0 25,425 28,815 33,900 33,900 33,900 33,900 33,900 33,900 33,900 33,900 0
Other income 0 0 0 0 0 0 0 0 0 0 0 9,960

TOTAL CASH OUTFLOW 20,727 19,362 22,132 24,723 26,324 26,390 27,201 27,261 27,320 27,380 27,440 0
Increase in fixed assets 15,473 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 5,254 695 1,042 0 1 0 0 0 0 0 0 0
Operating costs 0 18,167 20,590 24,223 24,223 24,233 24,233 24,233 24,233 24,233 24,233 0

Marketing and Distribution cost 0 500 500 500 500 500 500 500 500 500 500 0
Income (corporate) tax   0 0 0 1,600 1,657 2,467 2,527 2,587 2,647 2,707 0

NET CASH FLOW -20,727 6,063 6,683 9,177 7,576 7,510 6,699 6,639 6,580 6,520 6,460 9,960
-
CUMULATIVE NET CASH FLOW -20,727 14,664 -7,981 1,196 8,772 16,282 22,981 29,621 36,200 42,720 49,180 59,139
Net present value -20,727 5,512 5,523 6,895 5,175 4,663 3,782 3,407 3,069 2,765 2,491 3,840
-
Cumulative net present value -20,727 15,215 -9,692 -2,797 2,377 7,040 10,822 14,229 17,298 20,063 22,554 26,394

NET PRESENT VALUE 26,394

INTERNAL RATE OF RETURN 32.69%
NORMAL PAYBACK 4 years