37.

PROFILE ON THE PRODUCTION OF COSMETICS

 37-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 37-2

II. PRODUCT DESCRIPTION & APPLICATION 37-2

III. MARKET STUDY AND PLANT CAPACITY 37-3

A. MARKET STUDY 37-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 37-7

IV. MATERIALS AND INPUTS 37-8

A. RAW & AUXILIARY MATERIALS 37-8
B. UTILITIES 37-9

V. TECHNOLOGY & ENGINEERING 37-9

A. TECHNOLOGY 37-9
B. ENGINEERING 37-12

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 37-16

A. HUMAN RESOURCE REQUIREMENT 37-16
B. TRAINING REQUIREMENT 37-17

VII. FINANCIAL ANLYSIS 37-18

A. TOTAL INITIAL INVESTMENT COST 37-18
B. PRODUCTION COST 37-19
C. FINANCIAL EVALUATION 37-20
D. ECONOMIC & SOCIAL BENEFITS 37-22
 37-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of lipsticks with a capacity
of 15 tons per annum. Lipstick applies color, texture, and protection to the lips.

The demand for Lipstick is entirely met through import. The present (2012) demand for Lipstick
is estimated at 18 tons. The demand for Lipstick is projected to reach 29 tons and 47 tons by the
year 2017 and 2022, respectively.

The principal raw materials required are wax, oil, alcohol, and pigment which have to be imported.

The total investment cost of the project including working capital is estimated at Birr 13.12
million. From the total investment cost the highest share, Birr 11.33 million or 86.37% is
accounted by fixed investment cost followed by pre operation cost (Birr 1.45 million or 11.07 %)
and working capital (Birr 335.02 thousand or 2.55 %). From the total investment cost, Birr 6.12
million or 46.63% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 21.47% and a net present
value (NPV) of Birr 6.85 million, discounted at 10%.

The project can create employment for 29 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 generate income for the Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION & APPLICATION

Cosmetics (colloquially known as makeup or make-up) are care substances used to enhance the
appearance or odor of the human body. They are generally mixtures of chemical compounds,
some being derived from natural sources, many being synthetic.
 37-iv

A wide range of products are included in the broad category of cosmetics such as personal
hygiene, skin care, hair care and color cosmetics. But in this profile lipstick is considered for
production since it is highly demanded cosmetics product.

Lipstick is a cosmetic product containing pigments, oils, waxes, and emollients that applies
color, texture, and protection to the lips. Many varieties of lipstick exist. As with most other
types of makeup, lipstick is worn by women.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

In the past ten years, the demand for cosmetics was being met by both local production and
imported products. The contribution of local producers in the supply of cosmetics had been
growing over the period from 2001 to 2011. Their share was 35% in 2001 while in 2010 it shot
up to 69%. The average share of import of cosmetics in the previous five years was 40%.
Looking in to the aggregate supply of cosmetics for the period covering 2002--2011, though it is
generally growing in absolute terms, the trend showed four characteristics over the period under
consideration.
 37-v

Table 3.1
LOCAL PRODUCTION AND IMPORT OF COSMETICS (KG)

Year Local Production Import Total

2001 1,796,000 3,207,932 5,003,932

2002 2,813,000 1,137,523 3,950,523
2003 780,000 1,938,710 2,718,710
2004 1,087,000 1,540,125 2,627,125
2005 5,907,000 2,570,656 8,477,656
2006 8,191,000 3,601,186 11,792,186
2007 4,391,000 3,633,194 8,024,194
2008 4,304,000 3,471,943 7,775,943
2009 4,366,000 4,745,917 9,111,917
5,162,22
2010 11,605,000 4 16,767,224

Source: –Ethiopian Revenue & Customs Authority for Import and

--Central Statistical Agency for Local Production.

During the period 2001 – 2004, apparent consumption of cosmetics fell from 5,000 tons to 2,627
tons showing an average decline of 18% per annum. However, during the period 2005--2006,
apparent consumption of the product exhibited a significant increase, from 2,627 tons to 11,792
tons. However, this rise did not persist in 2007 and 2008; the supply of cosmetics has declined at
an average rate of 17%. On the other hand, in the subsequent periods (2009 and 2010), the
apparent consumption of cosmetic has increased by 17% and 84%, respectively and registered
the highest figure of 16,767 tons in 2010.

In order to estimate the present demand for cosmetics, based on the nature of the data the Holt’s
two parameter double exponential smoothing method is used.

Holt’s two parameter double exponential smoothing model is given by: -

F” t+m = St + mbt,
 37-vi

St = α Yt+ (1- α) (St-1 + bt-1), and

bt = β (St - St-1) + (1- β) bt-1.
Where:
F” t+m stands for forecasted value,
St indicates the long-term level or base value for the time-series data, i.e. the level term,
bt indicates the expected increase or decrease per year, i.e., the trend term,
Yt actual volume at time t,
m stands for the number of time periods we want to forecast,
t- represents time, and

Alpha and beta are smoothing parameters, where α = 0.5 and β = 0.3 in this case. Based on the
above model, the estimated present demand for cosmetics is shown in Table 3.2.
Table 3.2
HOLT’S TWO PARAMETER DOUBLE EXPONENTIALLY SMOOTHED FORECAST (KGs)

Supply in Smoothing Smoothing of Forecast

(Yt) of Data Trend (Trend Value
Year (Level Term) Term)
2001 5,003,932 5,003,932 1,053,409
2002 3,950,523 5,003,932 737,386 6,057,341
2003 2,718,710 4,230,014 283,995 5,741,318
2004 2,627,125 3,570,567 962 4,514,009
2005 2,570,656 3,071,092 149,168 3,571,530
11,792,18
2006 6 7,357,055 1,181,370 2,921,924
2007 8,024,194 8,281,309 1,104,235 8,538,426
2008 7,775,943 8,580,744 862,795 9,385,546
2009 9,111,917 9,277,728 813,052 9,443,540
16,767,22
2010 4 13,429,002 1,814,518 10,090,780
2011 17,416,51 15,243,520 1,814,518 15,243,521
 37-vii

5
2012 18,470,486

As per the calculation worked out in Table 3.2, the current effective demand for cosmetics is
estimated at 18,470 tons. According to the information from distributors and retailers about 1%
of the cosmetics is covered by lipstick. Hence, the current effective demand for lipstick is
estimated at 18 tons.

2. Demand Projection

The demand for cosmetics depends mainly on the growth of income, population, and growth of
urban population. Therefore, the demand for cosmetics is a derived demand, which depends
mainly on the level of income of the urban and semi-urban population. The combined effect of
these factors is believed to boost the demand for cosmetics products. Hence, in order to be
conservative a growth rate of 10% which is slightly lower than the expected growth rate of the
national income during the GTP period is used to project the demand. Apart from that, as past
trend showed, import can likely be substituted by local production.

Table 3.3
PROJECTED DEMAND FOR COSMETICS (TONS)

Total Project
Year
Demand
2013 20
2014 22
2015 24
2016 26
2017 29
2018 32
2019 35
2020 39
 37-viii

2021 43
2022 47

3. Pricing and Distribution

Based on the average CIF price reported by external trade statistics for 2011, and allowing 30%
for import duty and other clearing expenses, the factory-gate price for the envisaged plant is
estimated at Birr 420.55 per kg. The product will find its market outlet through the existing
general merchandize wholesalers.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity
Based on the market study and minimum economies of scale, the envisaged plant is proposed to
produce 15 tons of lipsticks per year, in 300 working days and operating in three shifts of 8 hours
each per day.

2. Production Program

The production program is set by considering just 300 working days per annum. The plant starts
operation at 70% of its full capacity operation and progressively grows to 85% and full capacity
operation in the second and third year and then after respectively. The production programme is
shown in Table 3.3.
Table 3.4
PRODUCTION PROGRAM

Year 1 2 3-10
Capacity utilisation (%) 70 85 100
Production of lipstick (kg) 10,500 12,750 15,000
 37-ix

IV. MATERIALS AND INPUTS

A. RAW MATERIALS
The major raw materials required for the production of lipsticks are wax, oil, alcohol, and pigment.
The wax used usually involves some combination of three types--beeswax, candelilla wax, or the
more expensive camauba. Wax enables the mixture to be formed into the easily recognized shape of
the cosmetic. Oils such as mineral, caster, lanolin, or vegetable are added to the wax. Fragrance and
pigment are also added, as are preservatives and antioxidants, which prevent lipstick from becoming
rancid. And while every lipstick contains these components, a wide variety of other ingredients can
also be included to make the substance smoother or glossy or to moisten the lips. Auxiliary raw
material is packing material for the finished product. All these raw materials are imported. The total
annual cost of raw materials is estimated at Birr 910,000. The annual raw materials requirement and
cost of the plant is shown in Table 4.1 below.

Table 4.1
ANNUAL RAW MATERIAL S REQUIREMENT &COST

Sr.No. Cost in '000 Birr

Item Qty.(in Kg) FC LC TC
1 Wax 3,000 240.00 - 240.00
2 Vegetable oil 6,000 270.00 - 270.00
3 Alcohol 3,000 75.00 - 75.00
4 Pigment 750 82.50 - 82.50
5 Fragrance 75 11.25 - 11.25
6 Anti-oxidant 75 6.75 - 6.75
7 Packing material Lump sum 225.00 - 225.00
Grand Total Cost 910.50 - 910.50
 37-x

B. UTILITIES

Water and electricity are utilities required by the plant. The total annual cost of utilities is estimated
at Birr 457,760. The annual consumption is shown in Table 4.2 below.

Table 4.2
ANNUAL CONSUMPTION OF UTILITIES &COST

Sr. Annual Cost (Birr)

No. Utility Unit of Consumption
Measure
1 Water m3 30,000 300,000
2 Electricity kWh 272,000 157,760
Total 457,760

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The manufacturing process of lipstick involves the following three separate steps:
 Melting and mixing the lipstick;
 Pouring the mixture into the tube; and
 Packaging the product for sale.
The detail description of each of the above process steps is given hereunder:

Melting and Mixing

 37-xi

First, the raw ingredients for the lipstick are melted and mixed—separately because of the different
types of ingredients used. One mixture contains the solvents, a second contains the oils, and a third
contains the fats and waxy materials. These are heated in separate stainless steel or ceramic
containers.

The solvent solution and liquid oils are then mixed with the color pigments. Themixture passes
through a roller mill, grinding the pigment to avoid a "grainy" feel to the lipstick. This process
introduces air into the oil and pigment mixture, so mechanical working of the mixture is required.
The mixture is stirred for several hours; at this point some producers use vacuum equipment to
withdraw the air.

After the pigment mass is ground and mixed, it is added to the hot wax mass until a uniform color
and consistency is obtained. The fluid lipstick can then be strained and molded, or it may be poured
into pans and stored for future molding.

If the fluid lipstick is to be used immediately, the melt is maintained at temperature, with agitation,
so that trapped air escapes. If the lipstick mass is stored, before it is used it must be reheated,
checked for color consistency, and adjusted to specifications, then maintained at the melt
temperature (with agitation) until it can be poured.

As expected, lipsticks are always prepared in batches because of the different color pigments that
can be used. The size of the batch, and the number of tubes of lipstick produced at one time, will
depend on the popularity of the particular shade being produced. This will determine the
manufacturing technique (automated or manual) that is used.

Molding
Once the lipstick mass is mixed and free of air, it is ready to be poured into the tube. A variety of
machine setups are used, depending on the equipment that the manufacturer has, but high volume
batches are generally run through a melter that agitates the lipstick mass and maintains it as a liquid.
For smaller, manually run batches, the mass is maintained at the desired mix temperature, with
agitation, in a melter controlled by an operator.
 37-xii

The melted mass is dispensed into a mold, which consists of the bottom portion of the metal or
plastic tube and a shaping portion that fits snugly with the tube. Lipstick is poured "up-side down"
so that the bottom of the tube is at the top of the mold. Any excess is scraped from the mold.

The lipstick is cooled (automated molds are kept cold; manually produced molds are transferred to a
refrigeration unit) and separated from the mold, and the bottom of the tube is sealed. The lipstick
then passes through a flaming cabinet (or is flamed by hand) to seal pinholes and improve the finish.
The lipstick is visually inspected for air holes, mold separation lines, or blemishes, and is reworked
if necessary.

For obvious reasons, rework of the lipstick must be limited, demonstrating the importance of the
early steps in removing air from the lipstick mass. Lipstick is reworked by hand with a spatula. This
can be done in-line, or the tube can be removed from the manufacturing process and reworked.

Labeling and packaging

After the lipstick is retracted and the tube is capped, the lipstick is ready for labeling and packaging.
Labels identify the batch and are applied as part of the automated operation. While there is a great
deal of emphasis on quality and appearance of the finished lipstick product, less emphasis is placed
on the appearance of lip balms. Lip balms are always produced in an automated process (except for
experimental or test batches). The heated liquid is poured into the tube in the retracted position; the
tube is then capped by machine, a far less laborious process.

The final step in the manufacturing process is the packaging of the lipstick tube. There are a variety
of packaging options available, ranging from bulk packs to individual packs, and including
packaging as a component in a makeup kit or special promotional offering. Lip balms are packaged
in bulk, generally with minimum protection to prevent shipping damage. Packaging for lipsticks
varies, depending on what will happen at the point of sale in the retail outlet. Packaging may or may
not be highly automated, and the package used depends on the end use of the product rather than on
the manufacturing process.
 37-xiii

2. Environmental Impact Assessment

There is little or no waste in the manufacture of lipstick. Product is reused whenever possible, and
since the ingredients are expensive they are seldom thrown out, unless no other alternative presents
itself. In the normal manufacturing process there are no by-products. Hence, the project does not
affect the environment.

B. ENGINEERING

1. Machinery and Equipment

The total cost of this machinery and equipment is estimated at about Birr 8,160,000, out of which
Birr 6,120,000 will be required in foreign currency. The list of machinery and equipment required
by the envisaged plant is given in Table 5.1.

Table 6.1
LIST OF MACHINERY AND EQUIPMENT

Sr. Item Qty.

No.
1 Mixing Machine 1
2 Seizing Machine 1
3 Grinding Machine 1
3.1 Tri-Roller Rolling Machine 1
3.2 Successive High speed Moleculized Instrument 1
– wet model.
4 Heating Mixing Machine for pearl ointment 1
5 Mold Sets 1
6 Filling Machine 1
6.1 Basic Type – conventional 1
 37-xiv

Sr. Item Qty.

No.
6.2 Plate Type 1
6.3 Semi-Automatic Type 1
6.4 Fully Automatic Type
7 Mold Releasing Machine By Air Blowing 1
Machine

2. Land, Building and Civil Works

The major buildings and civil works include buildings for production, offices, workshops and
warehouses. The total built up area required is about 1,000 m 2. The total land requirement
including sewers, storage, open spaces etc. is estimated to be 500 m 2.Total construction cost is
estimated at Birr 2.0 million for the building and other civil works.

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
 37-xv

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 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).
 37-xvi

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

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 266,000 of
which 10% or Birr 26,600 will be paid in advance. The remaining Birr 239,400 will be paid in
equal installments with in 28 years i.e. Birr 8,550 annually.

VI. HUMAN RESOURCE AND TRAINING REQUIREMENT

A. HUMAN RSOURCE REQUIREMENT

The plant will employ a total of 29 persons. The total annual cost of manpower is estimated at Birr
583,500. The detail human resource requirement of the plant and the monthly and annual salary
expenditure are shown in Table 6.1.
 37-xviii

Table 6.1
REQUIRED HUMAN RESOURCE AND COST (BIRR)

Sr. Manpower Required Monthly Annual

No. No. of Salary (Birr) Cost (Birr)
Persons
1 General Manager 1 6,000 72,000
2 Secretary 1 1,500 18,000
3 Personnel 1 2,000 24,000
4 Production supervisor 1 2,000 24,000
6 Chemist 1 2,500 30,000
7 Skilled operators 3 4,500 54,000
8 Semi-skilled Operators 3 3,000 36,000
9 Maintenance crew 2 3,000 36,000
10 Accountant 2 4,000 48,000
11 Sales and purchasing
2 4,000 48,000
officer
12 Unskilled labour 4 2,400 28,800
13 General service workers 8 4,000 48,000
Sub -total 29 38,900 466,800
Employees benefit(25% of
9,725 116,700
basic salary)
Total 48,625 583,500

B. TRAINING REQUIREMENT

The technical personnel of the plant should be trained by qualified engineers of the machinery
supplier for a week at project site during erection & commissioning. The cost of training shall be
Birr 45,000.
 37-xix

VII. FINANCIAL ANALYSIS

The financial analysis of the cosmetics 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
Raw material imported 120 days
Work in progress 1 day
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 13.12
million (see Table 7.1). From the total investment cost the highest share (Birr 11.33 million or
86.37%) is accounted by fixed investment cost followed by pre operation cost (Birr 1.45 million
or 11.07 %) and working capital (Birr 335.02 thousand or 2.55 %). From the total investment
cost, Birr 6.12 million or 46.63% is required in foreign currency.
 37-xx

Table 7.1

INITIAL INVESTMENT COST (‘000 Birr)

Local Foreign Total %

Sr.
Cost Cost Cost Share
No. Cost Items
1 Fixed investment
1.1 Land Lease 26.60 26.60 0.20
1.2 Building and civil work 2,000.00 2,000.00 15.24
1.3 Machinery and equipment 2,040.00 6,120.00 8,160.00 62.17
1.4 Vehicles 900.00 900.00 6.86
1.5 Office furniture and equipment 250.00 250.00 1.90
Sub -total 5,216.60 6,120.00 11,336.60 86.37
2 Pre operating cost *
2.1 Pre operating cost 594.80 594.80 4.53
2.2 Interest during construction 858.66 858.66 6.54
Sub- total 1,453.46 1,453.46 11.07
3 Working capital 335.20 335.20 2.55
Grand Total 7,005.26 6,120.00 13,125.26 100.00

* 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 412.54 thousand. However, only
the initial working capital of Birr 335.02 thousand 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 5.61 million (see Table
7.2). The cost of raw material account for 16.24% of the production cost. The other major
components of the production cost are depreciation, financial cost and labor, which account for
36.29%, 14.73% and 8.32 %, respectively. The remaining 24.42% is the share of utility, repair
and maintenance, labor overhead and administration cost. For detail production cost see
Appendix 7.A.2.
 37-xxi

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE)

Items Cost
(in 000 Birr) %
Raw Material and Inputs
911.00 16.24
Utilities
458.00 8.16
Maintenance and repair
245.00 4.37
Labor direct
467.00 8.32
Labor overheads
117.00 2.09
Administration Costs
200.00 3.56
Land lease cost
- -
Cost of marketing and distribution
350.00 6.24
Total Operating Costs
2,748.00 48.98
Depreciation
2,035.96 36.29
Cost of Finance
826.46 14.73
Total Production Cost
5,610.42 100

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 188 thousand to Birr 2.41 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 17.76 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.

2. Ratios
 37-xxii

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 3,849,270
Variable Margin ratio (%)

Break- Even Capacity utilization = Break -even Sales Value X 100 = 61 %

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 5 years.

5. Internal Rate of Return

 37-xxiii

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 21.47%% indicating the viability of the
project.

6. Net Present Value

Net present value (NPV) is defined as the total present (discounted) value of a time series of cash
flows. NPV aggregates cash flows that occur during different periods of time during the life of a
project in to a common measuring unit i.e. present value. It is a standard method for using the
time value of money to appraise long-term projects. NPV is an indicator of how much value an
investment or project adds to the capital invested. In principle, a project is accepted if the NPV is
non-negative.

Accordingly, the net present value of the project at 10% discount rate is found to be Birr 6.85
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 29 persons. The project will generate Birr 5.33 million in
terms of tax revenue. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports. The project will also create forward
linkage with the electronics manufacturing sub sector and also generates income for the
Government in terms of payroll tax.
 37-xxiv

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 37-24

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 182.20 204.98 227.75 227.75 227.75 227.75 227.75 227.75 227.75 227.75

Accounts receivable 189.03 209.02 229.00 229.00 229.71 229.71 229.71 229.71 229.71 229.71

Cash-in-hand 11.43 12.86 14.29 14.29 14.41 14.41 14.41 14.41 14.41 14.41

CURRENT ASSETS 382.67 426.85 471.04 471.04 471.87 471.87 471.87 471.87 471.87 471.87

Accounts payable 47.47 53.40 59.33 59.33 59.33 59.33 59.33 59.33 59.33 59.33

CURRENT LIABILITIES 47.47 53.40 59.33 59.33 59.33 59.33 59.33 59.33 59.33 59.33
TOTAL WORKING
CAPITAL 335.20 373.45 411.71 411.71 412.54 412.54 412.54 412.54 412.54 412.54

Appendix 7.A.2
 37-25

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 729 820 911 911 911 911 911 911 911 911

Utilities 366 412 458 458 458 458 458 458 458 458

Maintenance and repair 196 221 245 245 245 245 245 245 245 245

Labour direct 374 420 467 467 467 467 467 467 467 467

Labour overheads 94 105 117 117 117 117 117 117 117 117

Administration Costs 160 180 200 200 200 200 200 200 200 200

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

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

Total Operating Costs 2,268 2,508 2,748 2,748 2,757 2,757 2,757 2,757 2,757 2,757

Depreciation 2,036 2,036 2,036 2,036 2,036 105 105 105 105 105

Cost of Finance 0 945 826 708 590 472 354 236 118 0

Total Production Cost 4,304 5,489 5,610 5,492 5,383 3,334 3,216 3,098 2,980 2,862

Appendix 7.A.3
 37-26

INCOME STATEMENT ( in 000 Birr)

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

Sales revenue 5,047 5,677 6,308 6,308 6,308 6,308 6,308 6,308 6,308 6,308
Less variable costs 1,918 2,158 2,398 2,398 2,398 2,398 2,398 2,398 2,398 2,398

VARIABLE MARGIN 3,129 3,519 3,910 3,910 3,910 3,910 3,910 3,910 3,910 3,910
in % of sales revenue 61.99 61.98 61.98 61.98 61.98 61.98 61.98 61.98 61.98 61.98
Less fixed costs 2,386 2,386 2,386 2,386 2,395 464 464 464 464 464

OPERATIONAL MARGIN 743 1,133 1,524 1,524 1,515 3,446 3,446 3,446 3,446 3,446
in % of sales revenue 14.71 19.95 24.16 24.16 24.02 54.64 54.64 54.64 54.64 54.64
Financial costs 945 826 708 590 472 354 236 118 0
GROSS PROFIT 743 188 698 816 925 2,974 3,092 3,210 3,328 3,446
in % of sales revenue 14.71 3.32 11.06 12.93 14.67 47.15 49.02 50.89 52.76 54.64
Income (corporate) tax 0 0 0 245 278 892 928 963 999 1,034
NET PROFIT 743 188 698 571 648 2,082 2,165 2,247 2,330 2,413
in % of sales revenue 14.71 3.32 11.06 9.05 10.27 33.00 34.31 35.62 36.94 38.25

Appendix 7.A.4
 37-27

CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr)

Year Year Year Year Year Year Year Year Year Year Year
Item 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH
INFLOW 11,931 6,288 5,683 6,314 6,308 6,308 6,308 6,308 6,308 6,308 6,308 2,498
Inflow funds 11,931 1,241 6 6 0 0 0 0 0 0 0 0
Inflow operation 0 5,047 5,677 6,308 6,308 6,308 6,308 6,308 6,308 6,308 6,308 0
Other income 0 0 0 0 0 0 0 0 0 0 0 2,498
TOTAL CASH
OUTFLOW 11,931 3,510 4,678 4,799 4,882 4,806 5,302 5,219 5,136 5,054 3,790 0
Increase in fixed assets 11,931 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 383 44 44 0 1 0 0 0 0 0 0
Operating costs 0 1,918 2,158 2,398 2,398 2,407 2,407 2,407 2,407 2,407 2,407 0
Marketing and
Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0
Income tax 0 0 0 0 245 278 892 928 963 999 1,034 0
Financial costs 0 859 945 826 708 590 472 354 236 118 0 0
Loan repayment 0 0 1,181 1,181 1,181 1,181 1,181 1,181 1,181 1,181 0 0
SURPLUS (DEFICIT) 0 2,779 1,005 1,515 1,426 1,502 1,006 1,089 1,172 1,254 2,518 2,498
CUMULATIVE CASH
BALANCE 0 2,779 3,784 5,299 6,725 8,227 9,233 10,322 11,494 12,748 15,265 17,763

Appendix 7.A.5
 37-28

DISCOUNTED CASH FLOW ( in 000 Birr)

Year Year Year Year Year Year Year Year Year Year Year Scra
Item 1 2 3 4 5 6 7 8 9 10 11 p
TOTAL CASH INFLOW 0 5,047 5,677 6,308 6,308 6,308 6,308 6,308 6,308 6,308 6,308 2,498
Inflow operation 0 5,047 5,677 6,308 6,308 6,308 6,308 6,308 6,308 6,308 6,308 0
Other income 0 0 0 0 0 0 0 0 0 0 0 2,498

TOTAL CASH OUTFLOW 12,267 2,307 2,546 2,748 2,994 3,034 3,649 3,684 3,720 3,755 3,790 0
Increase in fixed assets 11,931 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 335 38 38 0 1 0 0 0 0 0 0 0
Operating costs 0 1,918 2,158 2,398 2,398 2,407 2,407 2,407 2,407 2,407 2,407 0

Marketing and Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0
Income (corporate) tax 0 0 0 245 278 892 928 963 999 1,034 0

NET CASH FLOW -12,267 2,740 3,131 3,560 3,314 3,274 2,659 2,624 2,588 2,553 2,518 2,498
11,62 19,19
CUMULATIVE NET CASH FLOW -12,267 -9,526 -6,396 -2,836 479 3,753 6,412 9,036 4 14,177 16,694 2
Net present value -12,267 2,491 2,587 2,675 2,264 2,033 1,501 1,346 1,207 1,083 971 963
Cumulative net present value -12,267 -9,775 -7,188 -4,513 -2,250 -217 1,284 2,631 3,838 4,921 5,891 6,854

NET PRESENT VALUE 6,854

INTERNAL RATE OF RETURN 21.47%
NORMAL PAYBACK 5 years