127.

PROFILE ON ESSENTIAL OIL OF

PEPPERMINT
 127-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 127-3

II. PRODUCT DESCRIPTION & APPLICATION 127-3

III. MARKET STUDY AND PLANT CAPACITY 127-4

A. MARKET STUDY 127-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 127-6

IV. MATERIALS AND INPUTS 127-7

A. RAW MATERIALS 127-7
B. UTILITIES 127-7

V. TECHNOLOGY & ENGINEERING 127-8

A. TECHNOLOGY 127-8
B. ENGINEERING 127-9

VI. MANPOWER & TRAINING REQUIREMENT 127-12

A. MANPOWER REQUIREMENT 127-12
B. TRAINING REQUIREMENT 127-13

VII. FINANCIAL ANALYSIS 127-14

A. TOTAL INITIAL INVESTMENT COST 127-14
B. PRODUCTION COST 127-15
C. FINANCIAL EVALUATION 127-16
D. ECONOMIC BENEFITS 127-18
 127-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of essential oil of pepper
mint with a capacity of 4.26 tonnes per annum. Pepper mint oil has high menthol content, and is
often used as a flavoring in tea, ice cream, confectionery, chewing gum, and tooth paste.

The major raw material required is herb ( meth Pipetia of labiatae family) which is available locally.

The present demand for the proposed product is estimated at 3.52 tonnes per annum. The
demand is expected to reach at 9.13 tons by the year 2018.

The total investment requirement is estimated at about Birr 5.71 million, out of which Birr 904.6
thousand is required for plant and machinery. The plant will create employment opportunities for
25 persons.

The project is financially viable with an internal rate of return (IRR) of 25.79 % and a net present
value (NPV) of Birr 4.65 million, discounted at 8.5%.

The project has a backward linkage effect with agriculture and a forward linkage effect with the
confectionery, pharmaceutical, chewing gum, tooth paste, tea, ice cream etc. producing
industries. 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

Essential oils are any of several chemicals that form the odoriferous essences of a number of
plants. Essential oils come from the flowers, fruits, leaves, roots, seeds, and bark of many
Plants. They are volatile liquids, mostly insoluble in water, but freely soluble in alcohol, ether,
vegetable and mineral oils. They are usually not oily to the touch.
 127-4

Peppermint is clear pale yellow color, volatile essential oil extracted from menth pipertia of
Labiatae family. It has a fresh sharp menthol smell and watery in viscosity. It is used as flavoring
of chewing gum, dentifrices, and medicines; in aroma therapy to stimulate mind, increase mental
agility and increase focus.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Mint oil of pepper is used as a source of menthol, ingredient of mouth wash, flavoring of
chewing gum, confectionery, liquors, etc. Currently, the domestic demand for mint of oil pepper
is entirely met through import. The imported quantity and value of mint oil of pepper in the past
nine years is given in Table 3.1.

Table 3.1
IMPORT OF ESSENTIAL OIL OF PEPPERMINT

Year Quantity (kg.) Value (Birr)

1998 7,726 244,799
1999 - -
2000 1,438 66,261
2001 3,239 245,016
2002 - -
2003 1,364 91,808
2004 3,463 205,059
2005 2,613 225,414
2006 6652 557,767
Total 26,495 1,636,124
Average 2,944 181,792
Source: - Customs Authority.

The data on Table 3.1 reveals that import of mint oil of pepper in the past nine years was highly
erratic. For instance the amount of mint oil of pepper imported during 1998 was 7,726 kg. But
 127-5

the following year there was no import of the product. Again the county imported 1,438 kg and
3,239 kg during year 2000 and 2001 respectively. Similarly as in the year 1999 there was no
import during year 2002. The amount of mint oil of pepper imported in the recent four years
(2003-2006) ranged between the lowest 1,364 kg and the highest 6,652 kg .

In the absence of trend in the data set, the recent four years (2003-2006) average quantity
imported to the country is assumed to reflect the current effective demand. Accordingly, the
current effective demand for mint oil of peppermint is estimated at 3,523 kg.

2. Projected Demand

Mint oil of pepper has a market both locally and abroad. The local demand for the product will
increase with the development of chewing gum, confectioneries, liquor industries and the like.
The industrial sector is forecasted to grow by 11.5% in the coming few years. Assuming this
growth rate will influence the demand for the product an annual average growth rate of 10% is
applied in forecasting the demand (see Table 3.2).

Table 3.2
PROJECTED DOMESTIC DEMAND FOR MINT OIL OF PEPPER(KG)

Year Projected Demand

2009 3,875
2010 4,263
2011 4,689
2012 5,158
2013 5,674
2014 6,241
2015 6,865
2016 7,552
2017 8,307
2018 9,138

Demand for mint oil of pepper will increase from 3,875 kg in the year 2009 to 5,158 kg and
9,138 kg by the year 2012 and 2018, respectively.
 127-6

3. Pricing and Distribution

Based on CIF price obtained from Customers Authority and giving some allowance for other
charges, the recommended factory-gate price is Birr 2,112 per kg.

The product can be sold directly to the end user industries in the country.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant capacity

The market study conducted on the demand for essential oil of peppermint has shown that there
is no local producer and the country's requirement is totally met through import. Based on the
market study and growth rate of the product users, the proposed plant capacity for the envisaged
plant is 4,263 kg per annum, working 300 days per annum in a single shift of 8 hours per day.

2. Production Programme

The production programme of the envisaged plant is indicated in Table 3.3.

Table 3.3
PRODUCTION PROGRAMME

Sr. Product Year of Production

1 2 3-10
No.
1 Capacity utilization (%) 80 90 100
2 Essential oil of peppermint(kg) 3,410 3,837 4,263
 127-7

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The main raw material used for extraction of essential oil of peppermint is the herb Pipertia of
Labiatae family. The raw material to be used by the envisaged plant is locally available in different
regions especially in the southern part of the country. The total annual cost of raw materials in local
currency is estimated at Birr 4,920,500.

Table 4.1
ANNUAL REQUIREMENT OF RAW MATERIALS & COST (AT FULL CAPACITY)

Sr. Description Qty. Unit Cost Cost in

No. (Birr) '000 Birr
1 Herb, meth Pipetia of labiatae 426.3 11,542.34 4,920.5
family (Tonnes)
Total 4,920.5

B. UTILITIES

Utilities required for manufacturing essential oil of peppermint include electric power, potable and
cooling water. The total cost of utilities is estimated at Birr 133,980. The annual utilities
requirement of the plant is given in Table 4.2.
 127-8

Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST

Unit of
Description Measure Qty. Cost in 000 Birr
Electricity kWh 28000 13.26
Furnace oil m3 18 105.12
Water m3 4800 15.6
Total 133.98

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Peppermint oil is extracted from the whole plant above the ground just before flowering. The
plant chopped in to a size of 1-3cm, and placed on a grid which is located at a certain distance
above the level of water which fills the bottom of the kettle. The water is vaporized indirectly by
steam flowing in a pipe coil submerged by the water. The water and the distilled oil coming from
the evaporator vessel are recovered in a separate water cooled condenser. The mixture flowing
out of the condenser is separated by decantation. The distilled water, which may contain some
oil, shall be sent to distillation tank in which the oil is extracted.

The production process of peppermint oil has no impact one environment. The solid waste
(straw) from steam distillation processes dried and transported to compost production or can be
used as energy source.
 127-9

2. Source of Technology

Indo German Pharma Equip.

Address: Plot No.48-A, Hlton Toys Compound, Kherani Road,Saki Naka,
Near Post Office, Mumbai-400 072, India
Phne: +(91)-(22)-28561861/28561862/28561863 Fax: +(91)-(22)-28561864
Website: http://www.indogermanpharma.net/multicolumn-plant.html

B. ENGINEERING

1. Machinery and Equipment

The list of production machinery and equipment required for the plant is provided in Table 5.1.
The total cost of plant machinery and equipment is estimated at Birr 904,600, out of which Birr
768,910 will be required in foreign currency.

Table 5.1
MACHINERY & EQUIPMENT REQUREMENT AND COST
Sr. Qty. Cost
Total in
No. Description (No.) (Birr)
000 (Birr)
F.C L.C
1 Chopper 1 - 45,230 45.23
2 Evaporator 1 180,920 - 180.92
3 Condenser 1 135,690 - 135.69
4 Florentine flask 1 180,920 - 208.05
5 Cooling tower 1 set - 90,460 90.46
6 Pump 1 63,322 - 63.32
7 Boiler 1 208,058 - 180.92
Grand Total 768,910 135,690 904.60
1. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 1,000 m 2. Out of this, 450 m2 is
built-up area. Out of the total built up area, 250m 2 is used for production hall, 120m2 for store
 127-10

and 80m2 for office building. Cost of building construction with at rate of Birr 2400 per m 2
amounts to Birr 1,080,000.

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.

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
 127-11

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.

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 m 2 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, which
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

Scored Point Grace Payment Down

Period Completion Payment
 127-12

Period
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 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 20.76 million of which 10% or Birr 2,076,000 will be paid in advance. The
remaining Birr 18.68 million will be paid in equal installments with in 28 years i.e. Birr 667,286
annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

In order to run the envisaged plant efficiently, 25 employees are required. The estimated annual
cost of manpower is Birr 306,000 the detail of which is shown in Table 6.1.
 127-13

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOUR COST

Sr. Req. Monthly Annual Salary

Description
No. No. Salary (Birr) (Birr)
1 Manager 1 3,000 36,000
2 Administration + Finance Head 1 2,500 30,000
3 Secretary 1 900 10,800
4 Sales and purchase Head 1 2,500 30,000
5 Production Supervisors 1 1,800
21,600
6 Chemist 1 1,000 12,000
7 Operators 4 2,400 28,800
8 Technicians 2 1,200 14,400
9 Laborers 6 2,100 25,200
10 Store keeper 1 600 7,200
11 Guard 4 1,400 16,800
12 Driver 2 1,000 12,000
Sub-Total 25 244,800
Employees benefit (25 %) 61,200
Grand Total 306,000

B. TRAINING REQUIREMENT

Training of production workers will be carried out during plant erection and commissioning by
the experts of the machinery suppliers. The cost of such training is estimated at Birr 35,000.
 127-14

VII. FINANCIAL ANALYSIS

The financial analysis of the essential oil of peppermint 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 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 5.71
million, of which 13 per cent will be required in foreign currency. The major breakdown of the
total initial investment cost is shown in Table 7.1.
 127-15

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,080.00 - 1,080.00
3 Plant Machinery and Equipment 135.69 768.91 904.60
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 437.94 - 437.94
7 Working Capital 668.35 - 668.35
  Total Investment cost 4,947.98 768.91 5,716.89

* N.B Pre-production expenditure includes interest during construction ( Birr 302.94

thousand ), training ( 35 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 6.03 million (see Table
7.2). The raw material cost accounts for 81.53 per cent of the production cost. The other major
components of the production cost are depreciation, financial cost and direct labour which
account for 6.25%, 4.17% and 2.43 % respectively. The remaining 5.61 % is the share of utility,
repair and maintenance, labour overhead and other administration cost.
 127-16

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

Items Cost %
Raw Material and Inputs
4,920.50 81.53
Utilities 133.98 2.22
Maintenance and repair
45.23 0.75
Labour direct 146.88 2.43
Labour overheads
61.20 1.01
Administration Costs 97.92 1.62
Land lease cost
- -
Total Operating Costs 5,405.71 89.57
Depreciation 378.26 6.27
Cost of Finance 251.49 4.17
Total Production Cost
6,035.46 100

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 806.48 thousand to Birr 1.24
million during the life of the project. Moreover, at the end of the project life the accumulated
cash flow amounts to Birr 11.06 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,
 127-17

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 = 24 %
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 4 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.
 127-18

Accordingly, the IRR of this porject is computed to be 25.79 % 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 4.65
million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 25 persons. In addition to supply of the domestic needs,
the project will generate Birr 1.95 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 has a backward linkage effect with agriculture and a forward linkage effect
with the confectionery, pharmaceutical, chewing gum, tooth paste, tea, ice cream etc. producing
industries.