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36.

PROFILE ON WICKS FOR LAMP AND


STOVES
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TABLE OF CONTENTS

PAGE

I. SUMMARY 36-3

II. PRODUCT DESCRIPTION & APPLICATION 36-3

III. MARKET STUDY AND PLANT CAPACITY 36-4


A. MARKET STUDY 36-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 36-6

IV. MATERIALS AND INPUTS 36-7


A. RAW & AUXILIARY MATERIALS 36-7
B. UTILITIES 36-8

V. TECHNOLOGY & ENGINEERING 36-9

A. TECHNOLOGY 36-9
B. ENGINEERING 36-10

VI. MANPOWER & TRAINING REQUIREMENT 36-13


A. MANPOWER REQUIREMENT 36-13
B. TRAINING REQUIREMENT 36-14

VII. FINANCIAL ANLYSIS 36-14


A. TOTAL INITIAL INVESTMENT COST 36-14
B. PRODUCTION COST 36-15
C. FINANCIAL EVALUATION 36-16
D. ECONOMIC BENEFITS 36-18

I. SUMMARY

This profile envisages the establishment of a plant for the production of textile wicks
with a capacity of 35,000 kg per annum. Wick is a string or piece of fabric that uses
capillary action to draw the fuel to the flame in a candle, oil lamp, or cigarette lighter.

Cotton staple yarn, which is available locally, is the basic raw material for production of
wick.
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The present demand for the proposed product is estimated at 21,000 kg per annum. The
demand is expected to reach at 54,418 tonnes by the year 2018.

The total investment requirement is estimated at about Birr 5.83 million, out of which
Birr 2.98 million is required for plant and machinery. The plant will create employment
opportunities for 15 persons.

The project is financially viable with an internal rate of return (IRR) of 16.13% and a net
present value (NPV) of Birr 2.40 million, discounted at 8.5%.

The plant will have backward linkage effect with the textile yarn producing industry. 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

Textile wick is a fiber cord that draws fuel to the flame of a stove, candle or lamp. A
bundle of fibers or a loosely twisted, braided or woven cord, tape, or tube of soft spun
cotton threads that by capillary attraction draws up to be burned a steady supply of the oil
in stoves, lamps, the melted tallow or wax in candles.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The demand for wicks of lamps and stoves is met through import. The major countries
which supply wicks for lamps and stoves to the Ethiopian market are China, India and
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Pakistan. Other countries from Europe and the Middle East also supply some amount of
the product to Ethiopia. Import of wicks for lamps and stove for the past nine years is
shown in Table 3.1.

Table 3.1
IMPORT OF WICKS FOR LAMPS & STOVES (K.G.)

Year Import Value (Birr)


1998 2,117 127,064
1999 3,365 247,712
2000 3,597 214,730
2001 9,575 230,556
2002 18,936 476,187
2003 6,104 208,262
2004 12,318 377,919
2005 14,145 213,755
2006 16,698 331,712
Source:- Ethiopian Customs Authority.

Table 3.1. reveals that import of lamps for wicks and stoves during the past nine years
(1998-2006) has generally shown an increasing trend except the fluctuation observed
during the period 2002/03. The imported quantity which was 2,117 kg during the year
1998 has increased to about 3,597 kg and 9,575 kg during the period 2000 and 2001
respectively. During the year 2002 the imported quantity has almost doubled when
compared to the previous year. During this period the amount has reached 18,936 kg.
However, in the following year the quantity imported declined to 6,104 kg. This could be
mainly due to the stock carry over from the period (2002) in which import was very high.
The imported quantity in the last three years i.e. 2004-2006, has increased consistently.
The imported quantity which was 12,318 kg during 2004 has increased to 14,145 and
16,698 kg by the year 2005 and 2006.

Generally, the annual growth of rate import was extremely very high especially during
the period 1998-2002 which is above 70%. During the recent three year annual average
growth is about 16.5%. In order to estimate the current demand a 12% annual average
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growth rate has been applied by taking year 2006 import as a base. Accordingly, current
demand for wicks of lamps and stoves in Ethiopia is estimated at about 21,000 k/g.

2. Projected Demand

The recent three years import data has revealed an average annual growth rate of more
than 16%. To be on the conservative side future demand is assumed to grow by 10% per
annum. The projected demand for the coming ten years is depicted in Table 3.2.

Table 3.2
PROJECTED DEMAND OF WICKS FOR LAMPS & STOVES (KG)

Year Projected Demand


2009 23,100
2010 25,410
2011 27,951
2012 30,746
2013 33,821
2014 37,203
2015 40,923
2016 45,015
2017 49,517
2018 54,468
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Demand for wicks for lamps and stoves are projected to reach 25,410 kg by the year
2010. By the years 2014 and 2018, the demand will grow to 37,203 kg and 54,468 kg,
respectively.

3. Pricing and Distribution

Based on the recent import data Birr 35 per kg is proposed as a factory gate price. The
product can get its market outlet through the existing general merchandise whole sale
enterprises.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

As per the out come of market study and the minimum scale of production, year of
construction and full capacity attainment period, an annual capacity of 35,000 Kg is
proposed for establishing a plant that produces textile wicks, assuming a single shift of 8
hours per day and 300 working days per annum.

2. Production Programme

The envisaged plant shall start at 70%, 80% & 90 % capacity in the first, second and third
years, respectively. Considering a time needed for development of production skill and
market penetration, in the fourth year and then after full capacity production will be
achieved (see Table 3.3).
Table 3.3
PRODUCTION PROGRAMME

Year 1 2 3 4-10
Capacity utilization (%) 70 80 90 100
Production (tonnes) 24,500 28,000 31,500 35,000
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IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw material required is cotton/staple yarn, which will be supplied from the
local textile mills operating in the country. The annual raw material cost is estimated at
Birr 405,000. The detail of raw material requirement and their respective cost is depicted
in Table 4.1.

Table 4.1
ANNUAL REQUIREMENT FOR RAW AND AUXILIARY MATERIALS AND
THEIR COSTS

Sr. Description Qty. Cost, 000 Birr


No. (Tonnes) F.C L.C Total
1 Cotton Yarn 38,850 - 380 380

2 Packing and labeling L.S - 25 25


Materials
Total - - 405 405

B. UTILITIES

The utilities required for a project that produces wicks are electricity and water. The
requirement and their respective cost of utilities is shown in the Table 4.2 below. The
total annual cost of utilities is estimated at Birr 51, 446.
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Table 4.2
UTILITIES REQUIREMENT AND COST

Sr. Description Quantity Unit price Total Cost,


No. (Birr) Birr
1 Electricity (kWh) 40,000 0.4736 18,946
2 Water (m3) 10,000 3.25 32,500
Grand Total 51,446
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V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The basic operations involved in the manufacturing of stove wicks before the braiding
process are: carry a bobbin of material, maintain tension of the material, payout the
correct quality of material as required but if the material running out or broken, the
carrier should stop the machine immediately.

In the braiding operation, threads of cotton, narrow fabrics or rope like structure formed
by crossing strands diagonally in such a way that one or more strands pass alternatively
over and under, one or more stands being laid in the opposite direction. Simple slide plate
machine consists of a deck driving mechanism a super structure on which it is mounted
the take up shear or rolls and the braiding die or guide. The deck is simply two flat plates
of cast iron or steel bolted together by means of a series of spacer studs.

After the production of long lengths on the braiding machines, stove wicks of the desired
length are cut and packed appropriately. The process does not have any adverse impact on
environment since there is no any waste to be generated.

2. Source of Technology

The machinery and equipment required for the production of Wick for stove can be
obtained from the following Indian supplier:

R.S Technology
29/2611, Gugu Gobind Singh Nagar, Sherpur chowk,
Ludhiana-141008, Punjab, India
Tel: 91-161-4611535
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Fax: 91-161-5017130

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the envisaged plant is given in Table
5.1.

Table 5.1
MACHINERY & EQUIPMENT REQUIREMENT & ESTIMATED COSTS

Sr. Description Cost, ( OOO Birr)


No. Qty. F.C L.C Total
1 A. Production Machinery & Equipment

Braiding Machines 2
Winding Machine 10
Packing Materials 3
Lump sum
Sub – Total - 1,400.23 850.06 1,250.29
2 B. Auxiliary Machinery & Equipment
Miscellaneous Tools and Ancillaries Lump sum
Sub – Total 546.3 182.11 728.41
Grand Total - 1,946.53 1,032.17 2,978.70

2. Land, Buildings & Civil Works

The production building will be made by hollow blocks, both sides of the walls will be
plastered, reinforced concrete floor, RHS truss and EGGA sheet roof, cement screed
floor. Taking into consideration space for easy movement and possible future expansion,
the total area of the project will be 500 square meters. The built-up area will be 350
square meters, out of which the 270m2 area will be covered by a building with
underground and ground floor for stores and production hall respectively while the
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remaining 80m2 will be used for the office building. Considering a unit construction cost
of Birr 2,300, the total construction cost is estimated at Birr 805,000.
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.
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Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 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 m 2 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 /m2 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%
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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.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 10.38 million of which 10% or Birr 1,038,000 will be paid in advance.
The remaining Birr 9.34 million will be paid in equal installments with in 28 years i.e.
Birr 333,643 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The plant requires both production and administrative manpower. The envisaged textile
wicks project manpower requirement is 15 persons. The total annual cost of man power is
estimated at Birr 162,750. The detail of manpower requirement and annual labour cost
including fringe benefits is shown in Table 6.1.
Table 6.1
MANPOWER REQUIREMENT AND ASSOCIATED ANNUAL SALARY COST

Sr. Req. Salary, Birr


No. Description No. Monthly Annual
A. Administration
1 General manager 1 3,000 36000
2 Secretary 1 900 10800
3 Store keeper 1 600 7200
4 Clerk 1 500 6000
5 Purchase/sales man 1 1,200 14400
6 Cashier 1 600 7200
Sub –total 6 81,600
B. Production
1 Skilled workers 3 1,800 21600
2 Helpers 2 700 8400
3 Driver 1 500 6000
4 Guards 3 1050 12600
Sub-total 9 48,600
Employee benefit (25% BS) 32,550
Total 15 162,750
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B. TRAINING REQUIREMENT

The production & technical head, mechanic, electrician and operators need at least one
months training on the technology and maintenance during commissioning of the plant.
Total training cost is estimated at about Birr 25,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the textile wicks 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 2 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 3% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
5.83 million, of which 18 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
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Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total


No. Cost Cost Cost
1 Land lease value 1,038.00 - 1,038.00
2 Building and Civil Work 805.00 - 805.00
3 Plant Machinery and Equipment 1946.53 1,032.17 2,978.70
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 250.00 - 250.00
6 Pre-production Expenditure* 539.73 - 539.73
7 Working Capital 126.80 - 126.80
Total Investment cost 4,806.06 1,032.17 5,838.23

* N.B Pre-production expenditure includes interest during construction ( Birr 389.73


thousand, training (Birr 25 thousand ) and Birr 125 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 1.31
million (see Table 7.2). The raw material cost accounts for 30.85 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and maintenance and repair which account for 24.75 %, 23.68% and
6.79% respectively. The remaining 13.94 % is the share of utility, direct labour, labour
overhead and other administration cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
405.00 30.85
Utilities 51.45 3.92
Maintenance and repair
89.10 6.79
Labour direct 52.08 3.97
Labour overheads
32.55 2.48
Administration Costs 46.87 3.57
Land lease cost
- -
Total Operating Costs 677.05 51.57
Depreciation 324.90 24.75
Cost of Finance 310.93 23.68
Total Production Cost
1,312.88 100

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 130.45 thousand to
Birr 698.49 thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 5.79 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
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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 = 26 %
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
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in a bank account. Accordingly, the IRR of this porject is computed to be 16.13 %


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 2.40 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 15 persons. In addition to supply of the
domestic needs, the project will generate Birr 1.72 million in terms of tax revenue The
plant will have backward linkage effect with the textile yarn producing industry. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.