61.

PROFILE ON NAIL MANUFACTURING

61-2 TABLE OF CONTENTS

PAGE

I.

SUMMARY

61-3

II.

PRODUCT DESCRIPTION & APPLICATION

61-3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

61-4 61-4 61-6

IV.

RAW MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

61-6 61-6 61-7

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

61-8 61-8 61-9

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

61-10 61-10 61-11

VII.

FINANCIAL ANALYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS

61-12 61-12 61-13 61-14 61-15

61-3 I. SUMMARY

This profile envisages the establishment of a plant for the production of nails with a capacity of 2,400 tonnes per annum.

The present demand for the proposed product is estimated at 18,541 tonnes per annum. The demand is expected to reach at 31,940 tonnes by the year 2017 .

The plant will create employment opportunities for 62

persons.

The total investment requirement is estimated at about Birr 7.22 million, out of which Birr 3.96 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 28 % and a net present value (NPV) of Birr 5.89 million discounted at 8.5%.

II.

PRODUCT DESCRIPTION AND APPLICATION

A nail is pin shaped sharp object of hard metal typically steel used as fastener. Nails are driven into the work piece by a hammer. A nail holds materials together by friction. The common kind of nail is called wire nail to distinguish it from other types of nails.

Tack is a short nail with a wide, flat head used for fixing carpets to floorboards and for stretching fabric on to wood.

61-4 III. MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

The nail markets is supplied by import as well as domestic production. Supply of nails is presented in Table 3.1 while domestic production is in the increase, imported nails seem to be decreasing indicating the successful substitution of domestic products. Particularly in the last three years the domestic production shows a significant growth of 70%.

The linear trend equation fitted for 1997-2005 total supply of nails reveals. Y = 1,339.9 X + 3,802.3 R2 = 71.2%

Applying this supply equation, the current effective demand for nails is estimated at 18,541 tons. Table 3.1. SUPPLY OF NAILS AND RACKS OF IRON OR STEEL Year Local 1997 1998 1999 2000 2001 2002 2003 2004 2005 3,494 2,702 2,454 2,773 3,817 5,190 5,330 8,664 15,335 Source: Customs Authority CSA, Survey of Manufacturing Industries Ton Import 375 5,810 6,449 5,325 7,950 6,582 3,282 4,961 4,025 Total 3,869 8,512 8,903 8,098 11,767 11,772 8,612 13,625 19,360

61-5

2.

Demand Projection

The demand for nails is related with construction and building sectors. New as well as renovation of buildings and other constructions are the main end users of nails. The growing construction sector development as evidenced in the successive increase of nail supplies is expected to consume more. Therefore in this study the linear trend equation; R2 = 71.2%

Y = 1,339.9 X + 3,802.3

is applied to project the demand for nails. Accordingly the demand for nails in 2017 will be 31,940 tons. Projected demand for nails is presented in Table 3.2. Table 3.2 PROJECTED DEMAND FOR NAILS

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tons 19,881 21,221 22,561 23,900 25,241 26,580 27,920 29,260 30,600 31,940

3.

Pricing and Distribution

The average retail price of nails at Addis Ababa is 7 Birr per kg. The recommended price for the new product under study is Birr 5 per kg.

61-6 Distribution of the product will be through own retail and wholesale shop, the main outlet being regional wholesale.

B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

According to the market study, and the economic scale of nail manufacturing, the rated capacity of the plant is proposed to be 2,400 tonnes of nail per annum.

The selected production capacity is based on 300 working days per annum, 3 shifts of eight hours each per day. maintenance. The rest of calendar days are left for cleaning and

2.

Production Programme

The production program is based on the time required for the adjustment of feedstock, labour and equipment to the technology selected. Accordingly capacity utilization is set as follows: IV. 75% of plant capacity during the 1st year 85% of plant capacity during the 2nd year 100% of plant capacity during the 3rd year

MATERIALS AND INPUTS

A.

RAW MATERIALS

Raw materials required for production of nails are:1. 2. Low carbon steel wire for both types, and Cold rolled steel sheet for roof nails.

61-7 Assuming that 12.5% of the total product will be roofing nails, the annual requirement of these raw materials is shown in Table 4.1. Roofing nails are usually galvanized for protection against corrosion. The finished products are packed with a hard rolled paper.

Table 4.1 SUMMARY OF ANNUAL CONSUMPTION FOR RAW AND AUXILIARY MATERIALS AND COST

Sr. No. 1. 2. 3. 4. 5. 6. 7.

Description

Unit of Measure

Annual Con's 2,324 112 8 16 1,500 204 FC

Cost in '000 Birr LC 1,464 90 0.52 25 1.9 8.8 64.6 1,654.82 TC 8,024 538 0.52 150 11.3 52.8 64.6 8,841.22

Low carbon steel wire Cold-rolled steel sheet Saw dust Zinc HCI Ammonium chloride Packing material Total

Tonnes Tonnes Tonnes Tonnes Lt. Tonnes

7,360 448 125 9.4 44 7,986.4

B.

UTILITIES

Industrial water of 250 m3 and electric power of 15000 kWh are consumed in this plant per annum. The total cost of utilities is estimated to be Birr 7,879. Details of which are shown in Table 4.2.

61-8 Table 4.2 ANNUAL REQUIREMENT OF UTILITIES AND COST

Sr. No. 1 2

Description

Qty.

Unit Price (Birr)

Cost ('000 Birr)

Electricity (kWh) Water (m3) Grand total

15,000 250

0.4736 3.10

7.104 0.775 7.879

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

Manufacturing of nails passes through the following steps.

Feeding of wire coil to nail making machine Forming the bottom and top portion of nail and cutting on the nail making machine manufacturing of flat head nails ends here

Manufacturing of the nail head on a washer making machine Polishing of head part Feeding the head to the nail making machine Punching of the head to the nail and pressing to umbrella shape Galvanizing

61-9 2. Source of Technology

Visiting Ethiopian Iron and Steel foundary Factory, which is located in Addis AbabaAkaki; and discussing with the technical personnel as well as referring to the technical document it is possible to compile information for the technology. B. ENGINEERING

1.

Machinery and Equipment

The list of machinery and equipment required for the manufacture of nails is given in Table 5.1. Total cost of machinery and equipment is estimated at Birr 3.969 million, out of which Birr 3.199 million is required in foreign currency. The plant needs one pick-up vehicle for transportation of finished product and for office activities. The total cost of vehicle is estimated at Birr 220,000. Table 5.1 MACHINERY AND EQUIPMENT REQUIREMENTS AND COST Sr. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Washer making machine Nail making machine Wire coil stand Accessories Head polisher Galvanizing equipment Compressor Surface grinder Weighing scale Hard pallet truck Total 1 4 4 4 set 1 pc 1 1 1 1 1 Description Qty. FC 600 1657.47 16.86 246.00 128.26 372 98.08 81.08 3199.75 Cost in '000 Birr LC 120.00 360.00 3.36 40.00 31.16 80.0 22.61 16.22 5 7 685.35 TC 720 2017.47 20.22 286.00 159.42 452.00 120.69 97.3 5 7 3969.1

61-10 2. Land, Building and Civil Works

The plant requires a total of 1000 m2 area of land out of which 600 m2 is built-up area which includes manufacturing area, raw material stock area, offices etc. Assuming construction rate of Birr 1300 per m2, the total cost of construction is estimated to be Birr 780,000. The total cost, for a period of 80 years with cost of Birr 0.15 per m2, is estimated at Birr 12,000. The total investment cost for land, building and civil works is estimated at Birr 792,000.

3.

Proposed Location

Availability of raw materials, labor force, utilities and infrastructure like road for ease of transportation of raw materials and products are the major factors considered for selection of location. Therefore, Butajira is proposed to be the best location for nails manufacturing plant.

VI.

MANPOWER AND TRAINING REQUIREMENTS

A.

MANPOWER REQUIREMENT

Total manpower requirement, including skilled and unskilled labour is 62 persons. Correspondingly, total annual labour cost, including fringe benefits, is estimated at Birr 453,000. Table 6.1 below shows the list of manpower required and the estimated annual labour costs.

61-11 Table 6.1 MANPOWER REQUIREMENT & LABOUR COST

Sr. No.

Job Position

Req. No.

Salary per Month

Salary per Year

A. Production 1. 2. Manger Production and maintenance supervisor 3. 4. 5. 6. 7. B. Others 1. 2. 3. 4. 5. 6. 7. 8. Stores, Finance ,administration and sales head Salesman Secretary Cashier/ clerk Store clerk Security guard Messenger/ cleaner Driver Total 1 1 1 1 2 1 1 62 600 600 600 450 500 200 450 37,750 7,200 7,200 7,200 5,400 6,000 2,400 5,400 453,000 1 1,300 15,600 Production clerk Operator Mechanic Labour 1 36 6 6 450 21,600 3,900 1,500 5,400 259,200 46,800 18,000 1 3 2000 3600 24,000 43,200

B.

TRAINING REQUIREMENT

All operators need basic training so that they can be acquainted to the operation. This can be done during the commissioning period of the plant. The cost of such training is estimated at Birr 50,000.

61-12 VII. FINANCIAL ANALYSIS

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

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Raw material, import Work in progress Finished products Cash in hand Accounts payable

3 years 8% 8.5% 30 days 30days 90days 5 days 30 days 2 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 7.22 million, of which 36 per cent will be required in foreign currency.

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

61-13 Table 7.1 INITIAL INVESTMENT COST

Sr. No. 1 2 3 4 5 6 7 Cost Items Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost Foreign Share 36

Total Cost (000 Birr) 12.0 780.0 3,969.1 125.0 200.0 508.6 1,629.6 7,224.4

* N.B Pre-production expenditure includes interest during construction ( Birr 358.63 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 10.39 million (see Table 7.2). The material and utility cost accounts for 85.12 per cent, while repair and maintenance take 1.91 per cent of the production cost.

61-14 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads Administration Costs Total Operating Costs Depreciation Cost of Finance Total Production Cost

Cost 8,841.22 7.88 198.46 271.8 90.6 181.2 9,591.16 518.41 286.11 10,395.68

% 85.05 0.08 1.91 2.61 0.87 1.74 92.26 4.99 2.75 100

C.

FINANCIAL EVALUATION

1.

Profitability

According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity (Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

61-15 2. Break-even Analysis

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

BE =

Fixed Cost Sales Variable Cost

= 25 %

3.

Pay Back Period

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 4 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 28% and the net present value at 8.5% discount rate is Birr 5.89 million.

D.

ECONOMIC BENEFITS

The project can create employment for 62 domestic needs, the project will generate Birr

persons.

In addition to supply of the

3.77 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.