2.

PROFILE ON COFFEE ROASTING,

GRINDING AND PACKING
 2-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 2-3

II. PRODUCT DESCRIPTION & APPLICATION 2-3

III. MARKET STUDY AND PLANT CAPACITY 2-4

A. MARKET STUDY 2-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 2-7

IV. MATERIALS AND INPUTS 2-8

A. RAW & AUXILIARY MATERIALS 2-8
B. UTILITIES 2-11

V. TECHNOLOGY & ENGINEERING 2-11

A. TECHNOLOGY 2-11
B. ENGINEERING 2-14

VI. MANPOWER & TRAINING REQUIREMENT 2-17

A. MANPOWER REQUIREMENT 2-17
B. TRAINING REQUIREMENT 2-18

VII. FINANCIAL ANLYSIS 2-19

A. TOTAL INITIAL INVESTMENT COST 2-19
B. PRODUCTION COST 2-20
C. FINANCIAL EVALUATION 2-21
D. ECONOMIC BENEFITS 2-23

I. SUMMARY

This profile envisages the establishment of a plant for the production of roasted and
grinded coffee with a capacity of 309 tons per annum.

The principal raw material is washed green coffee, which is available locally.
 2-3

There is a significantly large local and export demand for the product. The present
demand for the proposed product is estimated at 2,968 tons per annum. The demand is
expected to reach at 4,751 tones by the year 2020.

The total investment requirement is estimated at about Birr 8.59 million, out of which
Birr 1.33 million is required for plant and machinery. The plant will create employment
opportunities for 33 persons.

The project is financially viable with an internal rate of return (IRR) of 18.90 % and a net
present value (NPV) of Birr 10.82 million, discounted at 8.5%.

The project will create a backward linkage effect with coffee plantations. The
establishment of such plant will have a foreign exchange earning effect by exporting its
product to the global market.

II. PRODUCT DESCRIPTION AND APPLICATION

Coffee is a common name for any of a genus of trees of the madder family, and also for
their seeds (beans) and for the beverage brewed from them. The Arabica and Rubastas
are the two major types of commercial coffee. Chemicals extracted from expertly
processed and roasted coffee by hot water classified as non volatile are caffeine,
trigonelline, chlorogenic acid, phenolic acids, amino acids, aldehydes, ketones, esters,
amines, and mercaptanes. Undoubtedly the popularity of this beverage is, at least to
some extent, related to their stimulant effects. Average caffeine contents per cup of
brewed coffee is 110 mg. Caffeine is a mild psychostimulant that has been called the
most widely used psychoactive substance on earth.

Several varieties of processed green coffee usually are blended and roasted together to
produce the tastes, aromas and flavors popular with consumers. Ground coffee is
consumed by hotels, bars and cafeterias.
 2-4

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The demand for milled coffee is essentially limited to urban areas. The major users of the
product include hotels, bars, and cafeterias, whose customer is mainly the urban
population. The country’s requirement for milled coffee has been met through domestic
production and import. Table 3.1 shows the supply of the product from domestic
production and imports during the period 2000-2006.

During the period under reference, domestic production and imports averaged at 2534
and 210 tones, respectively, and average total supply stood at 2744 tones. Thus, domestic
production, on the average, accounted for 92 per cent of the country's requirement for
milled coffee.

Table 3.1
SUPPLY OF MILLED COFFEE (TONNES)

Domestic Total
Year  Production  Import Supply
2000 28 0.02 28.02
 2-5

2001 156 1452.1 1608.1

2002 300 6.78 306.78
2003 115 0.01 115.01
2004 259 3.44 262.44
2005 563 4.56 567.56
2006 16317 1.78 16318.8
Average 2534 210 2744

Sources: Customs Authority, External Trade Statistics, 2000- 2006.

CSA, Statistical Abstract, various years.

As can be seen from Table 3.1, the supply of milled coffee, which constitutes domestic
production and imports, exhibits considerable fluctuation. Therefore, it appears more
appropriate to consider the average annual supply for the period under reference as the
effective demand for the product for the year 2006. Since the consumption of milled
coffee is associated with the urban population, the demand for the product is assumed to
grow at the rate of 4% that corresponds to the annual growth rate of the urban population.
The present demand for milled coffee (i.e. for the year 2008) is thus estimated at 2,968
tonnes.

2. Projected Demand

The demand for milled coffee is exclusively influenced by urbanization. Accordingly, the
4% annual rate of urbanization is applied in projecting the demand for the product.
Assuming the existing domestic suppliers of the product will maintain their market share
(92%) of the projected demand, the market share of the envisaged plant is depicted in
Table 3.2.

Table 3.2

PROJECTED DEMAND FOR MILLED COFFEE (TONNES)

  Projected Market Share

 2-6

Year Demand Existing Envisaged

    Producers Plant
2009 3,086 2,840 247
2010 3,210 2,953 257
2011 3,338 3,071 267
2012 3,472 3,194 278
2013 3,611 3,322 289
2014 3,755 3,455 300
2015 3,905 3,593 312
2016 4,062 3,737 325
2017 4,224 3,886 338
2018 4,393 4,041 351
2019 4,569 4,203 365
2020 4,751 4,371 380

3. Pricing and Distribution

The retail price of domestically produced milled coffee ranges from Birr 40 to Birr 45 per
kg. Considering the average market price of Birr 42.5 per kg and allowing 20 per cent
for wholesale and retail margin, the envisaged plant is expected to sell its product at Birr
34 per kg.

The product can get its market outlet through the existing wholesale and retail network
that includes department stores, merchandise shops and supermarkets.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Based on the market study, the production capacity of the envisaged plant is 309 tones of
roasted, ground and packed coffee.

2. Production programme
 2-7

The production programme will be carried out in such a way that the plant will initially
produce 75% of the its capacity ,and then will raise its production to 85% in the second
year .It will then attain full capacity production in the third and succeeding years . Table
3.3 shows production programme.

Table 3.3
PRODUCTION PROGRAMME

Year Capacity Production Capacity

Utilization [Roasted Ground and
Packed Coffee (Tonne)
1 75% 231.75

2 85% 262.65

3 and then 100% 309

after

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The principal raw material required by the plant is cleaned green coffee bean. Coffee can
be sourced from different coffee growing regions such as SNNPRS and Oromia. During
the roasting process the green coffee beans loose weight due to evaporation of water .The
extreme limits of the weight loss termed as “ a loss in the fire ” are between 14 and 23 per
cent of the initial weight of coffee beans .Elimination of the silver skin of coffee beans
that amounts from 0.2% to 0.4% and the release of certain volatile elements also occurs
 2-8

during roasting ,taking the above mentioned weight loss in to account , the annual
requirement for green coffee at 100 percent capacity utilization rate is estimated :

Annual requirement of cleaned green coffee beans = 309 + (0.22*309) = 376.98 tones

Hence annual cost of cleaned green coffee at a rate of 25,000 Birr per ton will amount to
Birr 9,424,500.

The major auxiliary materials in the production of roasted, ground and packed coffee
comprise packing material of various types and quality .The packing material to be used
by the plant are metalized film , multi layer pouch with one way valve ,carton box and
scotch tape . The packing materials are currently being produced locally.

The proposed package sizes of printed metalized film and pouch with valve for packing
roasted and ground coffee are 250gm, 500gm and 1000gm.The packing size and package
type utilization is shown in the Table 4.1.

Table 4.1
PACKING MATERIAL AND PACKAGING SIZE UTILIZATION

Packaging Material Portion Package Size Portion [%]

250gm 500gm 1000gm
From Total
[%]
Metalized Film 95 50 30 15
(Aluminum foil)
Pouch with valve 5 5
Total 100 50 35 15
 2-9

The annual requirements of packing materials at 100 percent capacity utilization rate
production, including its cost estimates are shown on Tables 4.2 ,4.3 and 4.4.

Table 4.2
PACKING FILM AND POUCH ANNUAL CONSUMPTION AND COST

Package Total roasted Packing Annual Unit cost Total cost

Size ground coffee Film consumption [Birr/kg ] [Birr]
[kg] [Qtl] requirement [kg]
Kg/Qtl
Metalized film /Aluminum foil
250 1545.00 4 6180 67.5 417150
500 927.00 3.2 2966.4 67.5 200232
1000 463.50 2.56 1186.56 67.5 80092.8
Sub total 2845.50 10332.96
697474.8
Pouch with valve
500 154.50 3.6 154.5 125 19312.5
Sub Total 154.50 154.5 19312.5

Grand 3090.00 10487.46 716,787

Total

Table 4.3
PACKING CARTON ANNUAL CONSUMPTION AND COST

Package Total Roasted Packing Annual Unit Cost Total

Size Ground Carton Consumption [Birr/Pcs ] Cost
[Kg] Coffee Requirement [Pcs] [Birr]
[Qtl] Pcs /Qtl
Metalized film /Aluminum foil
250 1545.00 16 24720 2.25 55620
(25 packet/Carton )
500 927.00 10 9270 3.00 27810
(20 packet/Carton )
1000 463.5 7 3244.5 4.30 13951.35
(16 packet/Carton )
Sub total 2845.50 37234.5
97381.35
Pouch with valve
 2-10

500 154.50 10 1545 3.15 4866.75

(20 packet/Carton )
Sub Total 154.50 1545 4866.75

Grand 3090.00 38779.5 102,248.1

Total

Table 4.4
GUMMING PAPER ANNUAL CONSUMPTION AND COST

Package Total Roasted Gumming Annual Unit Cost Total

Size Ground Paper Requirement [Birr/Pcs ] Cost
[Kg] Coffee Requirement Of Reels [Birr]
[Qtl] [Reel /Qtl]
Metalized film /Aluminum foil
250 1545.00 0.72 1112.4 47.5 52839
(25 packet/Carton )
500 927.00 0.5 463.5 47.5 22016.25
(20 packet/Carton )
1000 463.5 0.42 194.67 47.5 9246.825
(16 packet/Carton )
Sub total 2845.50 1770.57
84102.075
Pouch with valve
500 154.50 0.52 80.2 47.5 3808.74
(20 packet/Carton )
Sub Total 154.50 80.2 3808.74

Grand 3090.00 1850.77 87,910.8

Total
B. UTILITIES

Electricity, fuel and water are the utilities required by the envisaged plant. Annual
requirements of electricity, fuel and water at full production capacity are estimated on
Table 4.5.

Table 4.5
ANNUAL UTILITY CONSUMPTION AND COST

Sr. Utility Estimated Annual Rate Total Cost

No. Consumption [Birr]
1 Electricity 27,000kwh 0.4736 birr/kwh 12787.2
 2-11

2 Black diesel(Naphtha ) 28,800lt 5.84 birr/lt 168,192

3 Water 200m3 3.25/m3 650
Total 181,629.2

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Ground coffee is categorizes in to two based on the processing conditions:

1) Depending up on color of the roasted coffee (roasting operation)

 Light roast (at low roasting temperature and time), foreigners preference
 Deep (dark roast), at high roasting temperature and time, local preference

2) Depending on the granular size and heterogeneity of the particles size (grinding
and mixing operations);

 Made of uniform particles of average size from which small powdery particles have
been separated.
 Made of particles of various size of which up to 50 per cent are of very small size

Coffee processing involves three distinct operations namely roasting, grinding and
packing .Clean coffee beans, prior to roasting is blended in desired proportions.

The aromatic values of coffee only become apparent once the beans have been exposed to
high temperatures during pyrolysis or roasting.
 2-12

Experts place the roasting zone between 180oC and 240oC the optimum temperature being
between 210oCand 230oC. Above this temperature, over roasting begins. In general ,four
principal groups of reaction occur during roasting : dehydration (deprive of moisture )
,hydrolysis (breaking down of water molecules in hydrogen and oxygen elements),
desmolysis and catalysis (for aiding the speeding up of chemical process).

The roasting process normally lasts for between 12 and 15 minutes. In slow roasting
techniques, it requires about 25 minutes .While roasting gives coffee its taste and aroma it
also changes the bean in certain ways.

The bean loses weight due to evaporation of water from the green coffee .About 02-0.4
percent silver skin is also eliminated due to roasting.

Roasting increases the endosperm to increasing volume due to the formation and
expansion of gas between 180oCand 220oC.This is manifested in a volumetric increase of
about 50 to 80 percent ,the extremes being between 30 and 100 percent .The bean
becomes porous and crumbles when pressure applied .

The minerals in coffee do not change noticeably during roasting, but their relative content
increases when the water and volatile organic components disappear.

The major post roasting operations comprise sorting, coating or glazing, blending, packing
and beverage preparing.

The roasted coffee is sometimes sorted to eliminate beans that are pale (too light) or
charred (too dark). Coffee beans are blended after roasting if there is too great a variation
in type.

Roasted coffees rapidly lose their flavor and aroma .In order to avoid this sufficiently
airtight packaging should be used which can preserve the qualities of the coffee for longer
period of time; the one way valve pouch technology serves this purpose. The skin of the
coffee to be released during roasting will be scrubbed using water so that the process will
not have any adverse impact on environment.
 2-13

2. Source of Technology

The technology of coffee roasting and grinding has been widely applied by many
countries for many years in the past .The following firm could be a possible supplier of the
required machine.

Company Name: OZTURK DEGIRMENLERI Makina Imalat San. Tic. Ltd.

Sti.
Contact Person: Mr. Yavuz OZTURKBAY
Street Address: 403 Street No : 12
City: Izmir
Province/State: Pinarbasi
Country/Region: Turkey
Telephone: 90-232-478 55 34
Mobile Phone: 00905354357356
Fax: 90-232-478 42 18

B. ENGINEERING

1. Machinery and Equipment

The envisaged plant requires the following production equipment. The machinery and
equipment required for the envisaged plant and corresponding cost is depicted in Table
5.1.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Description Qty. Unit Total Cost [Birr]

 2-14

No. Cost FC LC Total

[Birr]
1 Hopper and pneumatic 1 50,000 47,500 2500 50,000
transportation
assembly
2 Roaster 1 400,000 380,000 20000 400,000
3 De-stonner 1 200,000 190,000 10000 200,000
4 Bucket elevator 4 14,000 53,200 2800 56,000
5 Screw conveyor 3 10,000 28,500 1500 30,000
6 Stainless Silos 3 9000 25,650 1350 27,000
7 Stainless Mixer 2 19000 36,100 1900 38,000
8 Weigher 2 4000 7,600 400 8,000
9 Grinder 2 40000 76,000 4000 80,000
10 Manual Sealer 2 4000 7,600 400 8,000
11 Packing machine 1 350,000 332,500 17500 350,000
12 Laboratory equipment 1 50,000 47,500 2500 50,000
13 Compressor 1 35,000 33,250 1750 35,000
Grand Total     1,265,400 66,600 1,332,000

Thus, the total cost of machinery and equipment is Birr 1,332,000 out of which Birr
1,265,400 will be required in foreign currency.

2. Land, Building and Civil Works.

Land is required to accommodate plant building, management offices, social building for
workers, internal roads, adequate space for expansion and other industry related
activities. The total area for the envisaged plant is 1500 m 2 .The built up area is estimated
at 800m2. Out of the total built up area, 450m2 will be used for production facility, 250m2
for store and 100m2 for office building. At a rate of Birr 2300 Birr /m 2 the cost of
building and civil works will be Birr 1,840,000.

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,
 2-15

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 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
 2-16

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 this
profile since it is a manufacturing project a land lease rate of Birr 346 per m2 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%
 2-17

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 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 plant requires both direct and indirect man power .The direct manpower requires
Production and technique head, Quality Controller and Capper, production supervisor,
operator’s mechanic, electrician and packing workers .The indirect manpower consists of
plant manager and office management personnel. The complete list of manpower and
labor cost required by the plant is given in Table 6.1.

Table 6.1
MANPOWER REQUIREMENT AND LABOR COST (BIRR)

Sr. Description Req. Monthly Salary Annual Salary

No. No.
A. Administration and Management
1 General Manager 1 2,700 32,400
2 Secretary 1 800 9,600
3 Finance and Administration 1 2,300 27,600
head
 2-18

4 Commercial head 1 2,300 27,600

5 Sales person 2 1,200 28,800
6 Purchaser 1 1,200 14,400
7 Accountant 1 1,200 14,400
8 Cahier 1 900 10,800
9 Store keeper 1 800 9,600
10 Driver 2 700 16,800
11 Guard 2 500 12,000
12 Cleaning and messenger 2 450 10,800
Sub Total 16 9,800 214,800
B.PRODUCTION and TECHNIQUE
1 Production and technique 1 2,100 25,200
head
2 Quality Controller and 1 2,000 24,000
Capper
3 Production supervisor 1 1,300 15,600

4 Operator Mechanic 2 1,100 26,400

5 Electrician 2 1,100 26,400
6 Packing workers 10 450 54,000
Sub Total 17 14,300 171,600
Total 33 24,100 386,400
Employee Benefits (25% of 96,600
salary)
Grand Total 33 483,000

B. TRAINING REQUIREMENT

Training is required for production and technique employees including the production
supervisor, operator’s machine, electricians and packing employees and quality
controller. The training programme can be executed by making arrangements with the
supplier of the machinery and equipment. A total of Birr 50,000 is allocated to conduct
the training program that will take three to four weeks.

VII. FINANCIAL ANALYSES

The financial analysis of the coffee roasting grinding and packing project is based on
the data presented in the previous chapters and the following assumptions:-
 2-19

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 10 days
Work in progress 1 day
Finished products 15 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
8.59 million, of which 15 per cent will be required in foreign currency.

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

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 3,114.00 - 3,114.00
2 Building and Civil Work 1,840.00 - 1,840.00
3 Plant Machinery and Equipment 66.60 1,265.40 1,332.00
 2-20

4 Office Furniture and Equipment 100.00 - 100.00

5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 556.34 - 556.34
7 Working Capital 1,202.31 - 1,202.31
  Total Investment cost 7,329.25 1,265.40 8,594.65

* N.B Pre-production expenditure include es interest during construction (Birr 406.34

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 12.07
million (see Table 7.2). The raw material cost accounts for 85.56 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and direct labour which account for 4.86 %, 3.53% and 1.92 %
respectively. The remaining 4.14 % is the share of repair and maintenance, labour over
head, utility and other administration cost.

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

Items Cost %
Raw Material and Inputs
10,331 85.56
Utilities 181.63 1.50
Maintenance and repair
66.60 0.55
 2-21

Labour direct 231.84 1.92

Labour overheads
96.60 0.80
Administration Costs 154.56 1.28
Land lease cost
- -
Total Operating Costs 11,062.68 91.61
Depreciation 586.71 4.86
Cost of Finance 426.23 3.53
Total Production Cost
12,075.62 100

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 1.78 million to Birr
3.42 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 38.31 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
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
 2-22

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 = 21 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required
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 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
in a bank account. Accordingly, the IRR of this porject is computed to be 18.90 %
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
 2-23

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
10.82 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 33 persons. In addition to supply of the domestic
needs, the project will generate Birr 9.34 million in terms of tax revenue. The project will
create a backward linkage effect with coffee plantations. The establishment of such plant
will have a foreign exchange earning effect by exporting its product to the global market.
.