ECONOMIC ANALYSIS

Four major economic aspects of an investment. These are:

Total capital investment

annual operating cost
annual income
the annual profits

TOTAL CAPITAL INVESTMENT

DIRECT FIXED CAPITAL
Total plant direct cost (TPDC)
Equipment Purchase Cost (PC):

Here, I only consider main equipments for the production process of pasteurized milk and cheese
product. The main equipments to be purchased are listed below with units required and current
prices.

No. Description quantity Capacity Unit cost (birr) Cost (birr)

I. Reception section

1. Raw milk storage tank 2 2500L 3000 6000

2. Mechanical weigh scale 1 2000 2000
3. Filter 1 1500 1500
4. Milk pump 3000 3000
5. Lab equipments 10,000 10,000
(Thermometer, PH meter,
Test tube, Petri dish,
pipette and etc.)
II. Processing section
1.Milk pump 1 3000 3000
2.Flow control valve 1 50.8 mm 1600 1600
3.Plate pasteurizer 1 60,000 60,000
4.Homogenizer 1 90,000 90,000
5.Milk cooling tank 2 3000 6000
6.Vacuum degasser 1 2000 2000
7.Cheese vat 1 60,000 60,000
8.Cheese pressing machine 1 5000 5000
9.Cheese milling machine 5000 5000
10.
Cream separator 1 30,000 30,000
11.
Cream tank 1 500 500
12.
Cheese packaging 20,000 20,000
machine
13. Pasteurized milk packer 1 50,000 50,000
III. Refrigeration section
1. Simple product 2 6000 12,000
refrigerator
IV. Utilities
1. Hot water generator 1 20 KW 20,000 20,000
V. Electrical
A. Generator 1 60 KW 45,000 45,000
B. Electrical cables 2000 2000
TOTAL 434,600

Other remaining direct costs of the company are listed below.

No. Direct cost type Factor (DC/PC) Cost

1. Installation 0.6 260760

2. Process piping 0.35 152110
3. Instrumentation 0.5 217300
4. Insulation 0.03 13038
5. Electrical 0.1 43460
6. Building 1.5 651900
7. Yard improvement 0.15 65190
8. Auxiliary facility 0.6 260760
Total 1,664,518

Total plant direct cost (TPDC) = 434,600 +1,664,518 = 2,099,118 birr

Total Plant Indirect Cost (TPIDC)

This includes engineering and construction.

No. Indirect cost type Factor (IDC/TPDC) Cost

1. Engineering 0.25 524779.5
2. Construction 0.35 734691.3
TOTAL 1259470.8

Total Plant Cost (TPC) = TPDC +TPIDC = 2,099,118 + 1259470.8 = 3,358,588.8 Birr

Contractor’s fee and contingency costs (CFC)

This includes contractor’s fee and contingency.

No. Cost type Factor (CFC/TPC) Cost

1. Contractor’s fee 0.05 167929.4
2. Contingency 0.1 335858.9
TOTAL 503,788.32

DFC of an investment is calculated as:

DFC = TPC+ CFC

DFC = 3358588.8 + 503788.32 = 3,862,377.12 Birr

Fixed capital investment = 76% *total capital investment

3,862,377.12
Total capital investment = = 5,082,075.16 birr
0.76

Working capital = 15% Total capital investment

Working capital = 5,082,075.16 * 0.15

Working capital = 762,311.274 birr

ANNUAL OPERATING COST

This includes: Materials cost Transportation cost
Miscellaneous costs
Advertising/selling costs
Running royalties
Failed product disposal cost
 Labor-dependent cost
Utilities (heating/cooling utilities and power) cost
Waste treatment/disposal cost
Facility-dependent cost
Laboratory cost

Some of the main operating costs are discussed below.

Materials cost
Main raw materials needed for the production of cheese and pasteurized milk are milk, renin,
starter culture, and salt.

Bulk material Unit cost (birr) Annual amount Annual cost (birr)
(kg.)
Milk 15 3,090,000 46,350,000
Starter culture 25 15465 386625
Salt 1.5 300 450
Renin 150 1545 231750
Total 46968825

Labor cost

No. Particulars Number Salary/wage Total

s
Birr/month Birr/year
1. Plant Manager 1 15000 180000
2. Plant Operator 1 10000 120000
3. Field / Marketing supervisors 2 16000 192000
4. Processing supervisors 1 8000 96000
5. Mechanics 2 16000 192000
6. Driver 1 7000 84000
7. Secretary 1 8000 96000
8. Administrative/ Accounts staff 2 16000 192000
9. Laboratory staff 2 16000 192000
10. Dairy labour 15 25000 300000
11. Security 2 4000 48000
Total 25 141,000 1,692,000

Utilities cost
No. Utility item Unit cost (Birr) Annual amount Annual cost (birr)
1. Steam 5 500 kg/year 2,500
2. Water - 6,000,000 L -
3. Electric power 0.54 15,450 KW 8,343
Total 10,843

The approximate annual operating cost is to be summation of the above costs.

Annual operating cost =46968825 + 1,692,000 + 10,843 = 48,671,668 birr

ANNUAL INCOME
Revenues
The main source of revenue is the sale of main and side products.as I mentioned in the other
sections of the material the main products of the company/plant are pasteurized milk and cheese.
But, cream is considered as side product from the pasteurized and cheese processing line. More
detail of their conversion rate and unit cost is shown below.

No. Conversion Annual Unit Annual

production (kg) price (birr) price (birr)
Cheese block

1. Cheese 12% 185,400 50 9270000

2. Cream 7% 108,150 75 8111250
Pasteurized
milk block
1. Pasteurized 99.96 1544391.66 25 38609791.5
milk
2. Cream 0.039 608.34 75 45625.5
Total 56,036,667

Profits
A profitability analysis is performed to determine the annual net profits of an investment. A cash
flow analysis is performed to determine the net profits and net cash flow for each year, over the
lifetime of a project. These are described in detail below:

Gross profit
Is calculated by subtracting the annual operating cost (AOC) from the total annual revenues:

Gross Profit = Revenues - AOC

Gross profit = 56,036,667- 48,671,668 = 7,364,999 birr

Income tax
According to Ethiopian income tax scale the percentage of tax for this income is 35%.

Income tax = 0.35 * 7,364,999 =2,577,749.65 birr

Net profit
Net Profit = Gross Profit – Taxes

Net Profit = 7,364,999 -2,577,749.65 = 4,787,249 birr

Payback time
Total Investment
Payback time (in year) = =¿5,082,075.16/4,787,249 = 1.06 year
Net Profit

Return on investment
Net profit
Return on Investment (ROI) = ∗100=¿94%
Total investment
 TRANSACTION ANALYSIS

Here, I want to see the business transaction at the end of the first month operation. The main
transactions considered are discussed below. Following to these transaction analysis financial
statements are also presented.

Transaction (1). Investment: I decided to open dairy processing plant which mainly produces
cheese and pasteurized milk which I name as Ethio Dairy. On September 1, 2022, I invest
5,082,075 birr. The effect of this transition is shown below.

Assets = liabilities + Owner’s equity

Cash = My capital
1. +5,082,075 +5,082,075

Transaction (2). Purchase of Equipment for Cash. Ethio dairy will also purchase computers,
office equipment and materials for birr 50,000 in cash. The specific effect of this transaction and
the cumulative effect of the first two transactions are:

Assets = liabilities + Owner’s equity

Cash + com &equip’t = My capital
O.bal. 5,082,075 5,082,075
2. -50,000 +50,000 -
N.bal.5,032,075 50,000 = 5,082,075
*O.bal. is to mean old balance
*N.bal.is to mean new balance
Transaction (3). Purchase of Supplies on cash. Ethio dairy purchase bulk materials such as
starter culture, salt, and rennet for birr 61,882.5 in cash.
Assets = liabilities + Owner’s equity
Cash + com &equip’t + supplies = My capital
O.bal.5,032,075 50,000 5,082,075
3. -61,882.5 - +61,882.5 -
N.bal.4,970,192.5 50,000 61,882.5 = 5,082,075

Transaction (4). Purchase of raw milk from suppliers. Ethio dairy purchase milk from
suppliers for birr 4,635,000 during the whole month operation in cash. The source of this cash is
lion international bank and is expected to be paid after five year.
Assets = liabilities + Owner’s equity
Cash + com &equip’t + supplies + milk = Account My capital
payable
O.bal. 4,970,192.5 50,000 61,882.5 5,082,075
4. - - - +4,635,000 +4,635,000 -
N.bal 4,970,192.5 50,000 + 61,882.5 + 4,635,000 = 4,635,000 + 5,082,075

Transaction (5).product sales. Ethio dairy sales its main products and side products for birr
5,603,666.7 in cash.
Assets = liabilities + Owner’s equity

Cash + com &equip’t + supplies + milk = Account My capital + Reve .- Exp

payable
O.bal 4,970,192.5 50,000 61,882.5 4,635,000 = 4,635,000 5,082,075
5. +5,603,666.7 - -61,882.5 -4,635,000 - - +5,603,666.7 - 4696882.5
N.bal.10,573,859.2 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7- 4696882.5
 Transaction (6). Payment of Expense. Ethio dairy pays the following expenses in cash during
the month operation. Steam 250 birr, salaries of employee 169,200 birr, electric power 834.3
birr.
Assets = liabilities + Owner’s equity

Cash + com &equip’t + supplies + milk = Account My capital + Reve .- Exp

payable
O.bal.10,573,859.2 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7- 4696882.5
6. -250 - - - - - -250
- 169,200 - - - - - - -169,200
- 834.3 - - - - - - -834.3
N.bal.10,403,574.9 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7-4,867,166.8

Transaction (7). Withdrawal of Cash by Owner. I withdraw 1, 500,000 birr in cash from the
business for family purpose and care. The effect of this transaction is shown below.
Assets = liabilities + Owner’s equity

Cash + com &equip’t + supplies + milk = Account My capital + Reve .- Exp - Withdraw
payable
O.bal. 10,403,574.9 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7-4,867,166.8
7. -1,500,000 - - - - - - - -1, 500,000

N.bal.8,903,574.9 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7-4,867,166.8-1,

500,000

Summary of the transaction

Assets = liabilities + Owner’s equity

Cash + com &equip’t + supplies + milk = Account My capital + Reve .- Exp - Withdraw
payable
(1) +5,082,075 +5,082,075
(2) -50,000 +50,000
(3) -61,882.5 +61,882.5
(4) +4,635,000 +4,635,00
0
(5) +5,603,666.7 -61,882.5 -4,635,000 +5,603,666.7 - 4696882.5
(6) -250 -250
- 169,200 -169,200
- 834.3 -834.3
(7) -1,500,000 -1,500,000

8,903,574.9 + 50,000 + 0 + 0 = 4,635,000 + 5,082,075 +5,603,666.7-4,867,166.8-1, 500,000

FINANCIAL STATEMENTS
We have four common financial statements:
income statement
owner’s equity statement
balance sheet
statement of cash flow
Each of them is discussed below based on the transactions made by the company.
 Ethio dairy
Income statement
For the month ended September 30,2022

Revenue
Sales revenue 5,603,666.7
Expenses
Salaries expense 169,200
Utilities expense 1,084.3
Bulk materials expense 4,696,882.5
Total expense 4,867,166.8
Net income 736,499.9
Ethio dairy
Owner’s equity statement
For the month ended September 30,2022
My capital September 1 0
Add: Investments 5,082,075
Net income 736,499.9 5,818,574.9
Less: Drawings 1,500,000
My capital September 30 4,318,574.9
Ethio dairy
Balance sheet
September 30,2022
Assets
Cash 8,903,574.9
Compu& equipment 50,000
Bulk materials 0
Total assets 8,953,574.9
Liabilities and owner’s equity
Liabilities
Account payable 4,635,000
Owner’s equity
My capital 4,318,574.9
Total liabilities and owner’s equity 8,953,574.9

Ethio dairy
Statement of cash flows
For the month ended September 30,2022
Cash flows from operating activities
Cash receipts from revenues 5,603,666.7
Cash payments for expenses (4,867,166.8)
Net cash provided by operating activities 736,499.9
Cash flows from investing activities
Purchase of equipment (50,000)
Cash flows from financing activities
Investments by owner 5,082,075
Drawings by owner (1,500,000)
Bank loan 4,635,000
Net increase in cash 8,903,574.9
Cash at the beginning of the period 0
Cash at the end of the period 8903574.9