11.

PROFILE ON RICE FLOUR

 11-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 11-3

II. PRODUCT DESCRIPTION & APPLICATION 11-3

III. MARKET STUDY AND PLANT CAPACITY 11-4

A. MARKET STUDY 11-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 11-6

IV. MATERIALS AND INPUTS 11-7

A. RAW MATERIALS 11-7
B. UTILITIES 11-8

V. TECHNOLOGY & ENGINEERING 11-8

A. TECHNOLOGY 11-8
B. ENGINEERING 11-9

VI. MANPOWER & TRAINING REQUIREMENT 11-13

A. MANPOWER REQUIREMENT 11-13
B. TRAINING REQUIREMENT 11-13

VII. FINANCIAL ANLYSIS 11-14

A. TOTAL INITIAL INVESTMENT COST 11-14
B. PRODUCTION COST 11-15
C. FINANCIAL EVALUATION 11-16
D. ECONOMIC BENEFITS 11-18
 11-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of rice flour
with a capacity of 10,000 tonnes per annum.

The principal raw material required is rice, which is available locally.

The present demand for the proposed product is estimated at 29,378 tonnes per annum.
The demand is expected to reach at 47,035 tonnes by the year 2020.

The total investment requirement is estimated at Birr 20.08 million, out of which Birr
5.6 million is required for plant and machinery. The plant will create employment
opportunities for 35 persons.

The project is financially viable with an internal rate of return (IRR) of 20.37 % and a net
present value (NPV) of Birr 14.17 million, discounted at 8.5%.

The plant will have a backward linkage effect on the agricultural sector. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

Rice is the number one food crop in the world. Although it is consumed mainly in the
familiar whole kernel form, rice can also serve as the base material for a wide variety of
ingredients.

In general, rice has enjoyed a rapid growth rate in processed foods despite its cost
disadvantage versus other grains.
 11-4

Containing little to no fat, no cholesterol, and minimal sodium, rice contains all eight
essential amino acids, and is a good source of B-complex vitamins and essential minerals.
Importantly, it is also non-allergenic and gluten-free. These factors combined make rice
ingredients well-accepted by the consumer.

Rice flour is milled from either broken or whole grain and is used in breakfast cereals, rice
crackers, extruded snack foods, beverages, confectionery, pet foods, small goods, baby food,
as flavour carriers, coatings and batters, noodles, as bulking agents, as gelling or thickening
agents and in breads and biscuits. The envisaged project produces brown rice flour which
has more nuttier and better taste than white rice flour. It is useful for making breads, cakes,
muffins, or noodles. Brown rice flour contains no gluten.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Currently, there is no local rice flour producer as a result of which the demand for the
product is entirely met through import. The import statistics on rice flour which is
categorized under the heading semi or wholly milled rice is presented in Table 3.1.
 11-5

Table 3.1

IMPORT OF SEMI OR WHOLLY MILLED RICE ( TONNES)

Year Import
1997 2,314
1998 2,869
1999 3,637
2000 2,424
2001 3,806
2002 7,231
2003 14,256
2004 16,360
2005 14,833
2006 22,214

Source; External Trade Statistics of Customs Authority.

As could be observed from Table 3.1, the import volume has been consistently increasing
from year to year with some fluctuation. Import volume, which was 2,314 tonnes during
the year 1997, has increased to a level of 22,214 tonnes by the year 2003. During the
period of analyses (1997 – 2006), import of semi-or wholly-milled rice has registered an
average annual growth rate of 35.20%.

Since import has been consistently rising in the past 10 years with an annual average
growth rate of about 30% the current effective demand for the product is estimated by
taking year 2006 supply as a base and applying a 15% growth rate ( which is less than
half of the past trend). Accordingly, the present (2008) effective demand for rice flour is
estimated at 29,378 tonnes.

2. Projected Demand

The demand for rice flour is mainly determined by the growth rate of population and
income. Accordingly, 4% annual growth which is equivalent to urban population growth
rate is considered to be reasonable rate to project future demand (see Table 3.2).
 11-6

Table 3.2
PROJECTED DEMAND FOR RICE FLOUR (TONNES)

Projected
Year Demand
2009 30,553
2010 31,775
2011 33,046
2012 34,368
2013 35,743
2014 37,173
2015 38,659
2016 40,206
2017 41,814
2018 43,487
2019 45,226
2020 47,035

3. Pricing and Distribution

The current price of rice flour at Addis Ababa is about Birr 750 per quintal. For this
project, an ex-Factory price of Birr 675 per quintal is proposed.

The product could be distributed through retailers as well as with distribution centers to
be established by the new project itself.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Based on the market study the annual processing capacity of the envisaged plant is
10,000 tonnes of rice flour assuming that the plant covers 30% of the market share of
year 2013( two years construction period and four years full capacity attainment period),
based on 300 working days and a single shift of 8 hours per day.
 11-7

2. Production Programme

The production programme is shown in Table 3. 3. The production programme is set by

considering just 300 working days per annum.

Table 3. 3
PRODUCTION PROGRAMME

Year 1 2 3 4
Capacity utilisation (%) 70 80 90 100
Production programme (tons) 7,000 8,000 9,000 10,000

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The major raw material required for the production of rice flour is rice, which is being
produced in different regions at swampy areas like Amhara while poly propylene bag can be
obtained from local manufacturers. The annual material requirement of the plant is shown in
Table 4.1 below.

Table 4.1
ANNUAL RAW MATERIAL REQUIREMENT AND COST

Item Qty. Cost in '000

Birr

Rice 12,000tonnes 60,000

Packing Materials (Polypropylene sacks, 50kg) 200,000 pcs 400
Total Costs 60,400
 11-8

B. UTILITIES

Water and electricity are the utilities required by the plant. The annual consumption is
shown in Table 4.2 below.

Table 4.2
ANNUAL CONSUMPTION OF UTILITIES AND COST

Sr. Annual ('000 Birr)

No. Utility Unit Consumption
1 Water m3 5,000 16,250
2 Electricity kWh 125,000 59,200
Total 75,450

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

• Cleaning: - removes foreign objects, such as hey, straw, stone, tree stump, and snail shell,
from the paddy and prevents dust from getting mixed in the whitened rice for the
enhancement of the value of rice flour as well as to prevent malfunctioning of the following
process due to the mixing of dust.

• Husking: - rubs excessive husks off cleaned paddy. In the husking chamber, two rubbers
rollers with different speeds are installed. The rubber rollers here make it possible to obtain
husked rice with its bran layer intact, which prevents oxidation of husked rice during
transportation or export. Once removed, brown rice is separated from the husks through the
ventilation process.
 11-9

• Paddy Separator: separates some unhusked paddy from brown rice

by applying a difference in gravitational pull and surface friction. The
unhusked paddy, then, re-enters the husking process.

• Milling: in the milling process, several roller type of milling machines are employed
successively separate and reduce rice into smaller and smaller particle sizes by gradual
process. That is the gradual milling system is adopted for milling. This system consists of
the breaking, scalping and grinding, purification, reduction and dressing process.

The technology used to produce rice flour has no any negative environmental impact.

2. Source of Technology

The technology, machinery and equipment could be secured from the following machinery
supplier:

Company Name: Anyang General International Co., Ltd.

Phone Number: 86-372-5965148
Fax Number: 86-372-5951936
Address: 4A, Jinhao Plaza, Renmin Road, Anyang City, Henan Province. China,
Anyang, Henan, China
Website: http://www.agico.com.cn

B. ENGINEERING

1. Machinery and Equipment

The list and cost of machinery and equipment required by the plant is given in Table 5.1.
The cost of machinery and equipment is estimated at Birr 5.6 million, out of which Birr 4.76
million will be in foreign currency.

Table 5.1
 11-10

MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Item Description Quantit Cost(Birr)

No. y LC FC TC
1 Paddy cleaner 1 67,200 380,800 448,000
2 Paddy husker 1 37,800 214,200 252,000
3 Paddy separator 1 63,000 357,000 420,000
4 Washer and stone separator 1 54,600 309,400 364,000
5 Screw conveyor 3 50,400 285,600 336,000
6 Bucket elevator 2 46,200 261,800 308,000
7 Pneumatic conveying Set
equipment 69,720 395,080 464,800
8 Aspirator 1 33,600 190,400 224,000
9 Weighing scale 1 16,800 95,200 112,000
10 Rotary magnetic separator 1 50,400 285,600 336,000
11 Double Roller mill 3 1,428,00 1,680,00
252,000 0 0
12 Gyratory Sifter 1 19,320 109,480 128,800
13 Packing machine 1 18,480 104,720 123,200
14 Bag filter 1 42,000 238,000 280,000
15 Suction fan 2 18,480 104,720 123,200
Total 4,760,00 5,600,00
840,000 0 0

2. Land, Building and Civil Works

The major buildings and civil works include the following.

- Buildings for production (300m2), offices (70m2), workshops and

warehouses (130m2). Hence the total built up area is about 500m2.

- Total land requirement including storage, open spaces etc. is estimated to be

1,500m2.

Total construction cost is estimated at Birr 1.15 million for the building and other civil
works assuming a construction rate of 2,300 Birr per m2.
 11-11

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

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

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

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

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

Regarding land allocation of industrial zones if the land requirement of the project is
blow 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.
 11-12

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.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
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 period of lease for
industry is 60 years.
 11-13

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 31.14 million; of which 10% or Birr 3,114,000 will be paid in advance.
The remaining Birr 28.03 million will be paid in equal installments with in 28 years i.e.
Birr 1,000,929 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower requirement of the plant and the monthly and annual salary expenditure are
shown in Table 6.1.
Table 6 .1
REQUIRED MANPOWER AND LABOUR COST (BIRR)

Sr. Manpower Req. Monthly Annual Cost

No. No. Salary
1 General Manager 1 3,000 36,000
2 Secretary 1 700 8,400
3 Technical Manager 1 2,500 30,000
4 Personnel 1 1,200 14,400
5 Production Head 1 1,500 18,000
6 Supervisor 1 1,200 14,400
7 Chemist 1 1,000 12,000
8 Skilled operators 5 3,500 42,000
9 Semi-skilled Operators 5 2,000 24,000
10 Maintenance crew 5 3,500 42,000
11 Accountant 1 1,300 15,600
12 Sales Man 2 2,000 24,000
13 Unskilled labour 10 2,000 24,000
Total 35 25,400 304,800

B. TRAINING REQUIREMENT

The technical personnel of the plant should be trained by qualified engineers of the
machinery supplier. The cost of training is estimated at Birr 50,000.
 11-14

VII. FINANCIAL ANALYSIS

The financial analysis of the rice flour 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 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 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
20.08 million, of which 22 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 11-15

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Forigin Total

Cost Cost Cost
No.
1 Land lease value 3,114.00 - 3,114.00
2 Building and Civil Work 1,150.00 - 1,150.00
3 Plant Machinery and Equipment 840.00 4,760.00 5,600.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 250.00 - 250.00
6 Pre-production Expenditure* 694.11 - 694.11
7 Working Capital 11,173.87 - 11,173.87
Total Investment cost 17,321.98 4,760.00 22,081.98

* N.B Pre-production expenditure includes interest during construction ( Birr 544.11

thousand, training (Birr 50 thousand ) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 62.45
million (see Table 7.2). The raw material cost accounts for 96.70 per cent of the
production cost. The other major components of the production cost are cost depreciation
and financial cost which account for 1.38 % and 0.76 % respectively. The remaining
1.15 % is the share of repair and maintenance, direct labour and other administration cost.
 11-16

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
60,400.00 96.70
Utilities 75.45 0.12
Maintenance and repair
280.00 0.45
Labour direct 182.88 0.29
Labour overheads
60.96 0.10
Administration Costs 121.92 0.20
Land lease cost
- -
Total Operating Costs 61,121.21 97.86
Depreciation 863.20 1.38
Cost of Finance 475.25 0.76
Total Production Cost
62,459.66 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 2.98 million to Birr
3.03 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 47.07 million.

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
 11-17

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 of the project including cost of finance when it starts to operate at full
capacity (year 3) is estimated by using income statement projection.

BE = Fixed Cost = 31 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover 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 6 years.

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
 11-18

in a bank account. Accordingly, the IRR of this porject is computed to be 20.37 %

indicating the vaiability 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
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be Birr
14.17 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 35 persons. In addition to supply of the domestic
needs, the project will generate Birr 9.43 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. It also create a backward linkage effect with the
agricultural sector.
.