115.

PROFILE ON AVOCADO OIL

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TABLE OF CONTENTS

PAGE

I. SUMMARY 115-3

II. PRODUCT DESCRIPTION & APPLICATION 115-3

III. MARKET STUDY AND PLANT CAPACITY 115-4

A. MARKET STUDY 115-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 115-6

IV. MATERIALS AND INPUTS 115-7

A. RAW & AUXILIARY MATERIALS 115-7
B. UTILITIES 115-7

V. TECHNOLOGY & ENGINEERING 115-8

A. TECHNOLOGY 115-8
B. ENGINEERING 115-10

VI. MANPOWER & TRAINING REQUIREMENT 115-13

A. MANPOWER REQUIREMENT 115-13
B. TRAINING REQUIREMENT 115-14

VII. FINANCIAL ANLYSIS 115-15

A. TOTAL INITIAL INVESTMENT COST 115-15
B. PRODUCTION COST 115-16
C. FINANCIAL EVALUATION 115-17
D. ECONOMIC BENEFITS 115-19

I. SUMMARY

This profile envisages the establishment of a plant for the production of avocado oil for
industrial use with a capacity of 80 tonnes per annum.

The major raw material required is avocado fruit, which is produced locally.

The present demand for the proposed product is estimated at 47 tonnes per annum. The
demand is expected to reach at 198 tonnes by the year 2022.
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The total investment requirement is estimated at Birr 8.35 million, out of which Birr 3.5
million is required for plant and machinery. The plant will create employment
opportunities for 24 persons.

The project is financially viable with an internal rate of return (IRR) of 14.97 % and a
net present value (NPV) of Birr 2.83 million, discounted at 8.5%.

The project has a backward linkage with agriculture and a forward linkage with soap and
cosmetics industries. The establishment of such factory will have a foreign exchange
earning effect to the country by exporting its product to the global market.

II. PRODUCT DESCRIPTION AND APPLICATION

Avocado oil is heavy oil that is rich in vitamin A and E. Avocado oil has various
industrial applications. It is a superb addition in soap making because of its high
percentage of unsaponifiables namely oleic, palmitic and linoliec acids. It is used both as
an emollient and helps to retard moisture loss. It is also greatly used for shaving soap, as
it reduces razor drag and facilitates better shaving. Dehydrated avocado fruit can be
harvested from different regions of the country.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Non edible avocado oil is used by cosmetics manufacturers and the local cosmetics
manufacturing industry is at an early stage of development. Therefore, the envisaged
product is mainly for export market.
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According to the International Trade Center (ITC) market brief (2006) the market for non
edible avocado oil is expanding. World trade in the product grew on average by 13% and
8% annually in terms of volume and value respectively during the period 2000 – 2005.

China and India are the principal producers and suppliers of avocado oil to international
markets. In 2005, total world imports of avocado oil reached 371 tons valued at USD 59
million, of which China and India’s exports contributed USD 14 million and USD 9
million, respectively, for quantities exceeding 85 tons each. The United States, Malaysia
and Germany are among the major markets for avocado oil. In 2005, the United States
accounted for 24% of the total value of avocado oil imports, followed by Malaysia 8%
and Germany 7%.

To estimate the present global demand for the product the average growth rate registered
by world avocado oil export during the period 2000 – 2005 in terms of volume i.e. 13% is
assumed to continue in the near future. Accordingly, taking the 2005 level of
international trade (371 tonnes) as a base and applying 13% annual growth rate the
current (2007) demand for the product is estimated at 473.73 tonnes. In order to be
conservative the market share that could be capture by locally produced avocado oil for
industrial use is assumed to be 10% which is 47 tonnes.

2. Projected Demand

The global market for non edible avocado oil is expanding one. Therefore based on past
trend, it can be assumed that the market grows at an annual growth rate of 5%.
Accordingly by taking the estimated present demand as a base and applying a 5% growth
rate, the projected demand for the product and estimated share of local product is shown
in Table 3.1.
Table 3.1
PROJECTED DEMAND

Year Projected Market Share

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Global of Local
Demand Product
2008 521 52
2009 573 57
2010 631 63
2011 694 69
2012 763 76
2013 839 84
2014 923 92
2015 1,015 102
2016 1,117 112
2017 1,229 123
2018 1,352 135
2019 1,487 149
2020 1,635 164
2021 1,799 180
2022 1,979 198

3. Pricing and Distribution

Based on international price of non-edible avocado oil/industrial and other costs, a

factory-gate price of Birr 32,742 per tonne is recommended. The product can be sold
directly to the end user industries.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The market study for industrial avocado oil indicates (Table 3.1) that the demand for the
product in 2009 will be 57 tonnes, and is shown to grow to 198 tonnes by the year 2022,
respectively. Considering two years construction period and three years for full capacity
attainment, the envisaged plant will have annual production capacity of 80 tonnes(year
2012 demand) of industrial avocado oil per annum. The plant will operate double shift of
16 hours a day and 300 days a year.
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2. Production Programme

Considering the need for skill development and the time required for market penetration
(export market) the processing plant will be planned to start operation at 70% of the
capacity in the first year, and will grow to 80% and 90% in the second and third years
respectively. The plant will operate at full capacity operation in the fourth year and then
after.

Table 3.3
PRODUCTION PROGRAMME

Year 1 2 3 4-10
Capacity utilization (%) 70 80 90 100
Production (tonnes) 56 64 72 80

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The main raw material required is ripe avocado fruit. This raw material yields as much
as 25-30% oil. This fruit grows in different regions of the country like Gambella,
Benshangul Gumuz, SNNPRS and Oromia. Wastes of avocado fruit generated during
harvesting and handling can be used for the production of non edible avocado oil.

Auxiliary materials include barrels (metallic drums). The total annual cost of raw and
auxiliary material is estimated at Birr 564,000. Annual requirement of raw and auxiliary
materials, including costs is shown in Table 4.1 below.

Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST (AT FULL
CAPACITY)
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Sr. Description Qty. Cost (‘000 Birr)

No.
1 Ripe avocado fruit 270 540
(tonnes)
2 Metallic barrels (pcs) 400 24
Total - 564

B. UTILITIES

Utilities required for industrial avocado oil plant consists of electricity, water, fuel oil and
lubricants. The total annual cost of utilities is estimated at Birr 63,759. Annual
requirement of each of these inputs at full capacity production is shown in Table 4.2
below.
Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST

Sr. Description Qty. Unit Cost (‘000 Birr)

No. Price
1 Electricity (kWh) 40,000 0.4736 18.944
2 Water (m3) 7500 3.25 24.375
3 Fuel oil (litres) 3500 5.84 20.440
Total 63.759

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Avocado oil for industrial use consists of the following unit operations:

a) Sorting out of ripe avocado fruit

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b) Washing
c) Scalding
d) Peeling
e) Pressing
f) Refining
g) Filling, packing and dispatching to market

Ripe avocado fruit harvested from farm in first properly sorted out and is prepared for
processing. The damaged cenes are avoided from being processed. The sorted out fruit
is then washed to remove any foreign material that might have passed from farm area to
this stage. The washed avocado fruit is then dried and scalded by hot water produced by
a boiler. This action further removes unwanted particles that might have possibly
remained attached to the fruit.

The next operation is peeling. This is carried out by a machine, where the upper skin of
the fruit is carefully removed and discharged as waste. The inner part is directly charged
into a pressing machine where the oil is separated from the non-oil part. The crude oil is
then refined by a refinery unit. The output of the refinery is then charged into a filling
machine, where the industrial avocado oil is filled into metallic containers for final
dispatch into market.

The plant has no any adverse impact on environment. The soap stock that will be
generated in the refining process will be used by soap producers. The other waste that
could be generated is the peel and solid waste after regeneration. This is also used for
essential oil extraction and fertilizer or animal feed, respectively.

2. Source of Technology

The machinery and equipment required for processing avocado fruit to produce oil for
industrial use can be procured from the following companies:

1) JAWLA Engineering Company

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6, MADHU IND. EST., OFF 11B PATEL ROAD

GORE GAONE (E)
Mumbai – 4000063, Maharashtra, India
Phone: 91-22-56902548/56903038
Fax: 91-22-26862622

2) Shanghai Small Enter Prise Trade

Development Service Centre
International Cooperation Division
Shanghai 200032
Fax: (00862) (64220814).
B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the production of industrial avocado oil
is shown in Table 5.1 below. The total cost of machinery and equipment is estimated at
Birr 3.5 million, out of which Birr 2.975 million is required in foreign currency.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Description Qty. Cost(‘000 Birr)

No. LC FC TC
1 Washing basins (stainless steel 4
basins) 57.75 327.25 385
2 Hot water washing basins (stainless 4
steel) 78.75 446.25 525
3 Peeling machine 1 36.75 208.25 245
4 Filter press 1set 94.5 535.5 630
5 Settling tank 2 15.75 89.25 105
6 Oil refinery 1 set 105 595 700
7 Filling machine 1 52.5 297.5 350
8 Boiler (hot water generation) 1 set 63 357 420
9 Miscellaneous-laboratory Reqd. 21 119 140
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equipment, measuring devices, tools,

etc
Grand Total 525 2,975 3,500
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2. Land, Building and Civil Works

Industrial avocado oil processing needs land for storing raw material and final product,
factory building, administration and general purpose building, pathways, and space for
expansion in the future. A total of 1000 square meters of land is allotted for the
envisaged plant. Of the total land leased for the processing plant 600 m 2 will be built-up
area, 400m2 for factory building, 120m2 for store and 80m2 for office building and at the
rate of Birr 2,500 per m2, the building and civil construction cost will be Birr 1,500,000
million.

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.
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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 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 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, 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.
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Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
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 & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The processing plant requires direct production workers and administrative and
supervisory staff. The total annual cost of manpower is estimated at Birr 255,000.
Details of manpower requirement and estimate of annual expenses on salaries is shown in
Table 6.1.
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Table 6.1
MANPOWER REQUIREMENT AND LABOUR COST

Sr. Description Req. Monthly Annual Salary

No. No. Salary (Birr) (Birr)
A. Administration
1 Plant manager 1 3,000 36,000
2 Secretary 1 900 10,800
3 Accountant 1 1,200 14,400
4 Sales/purchase man 1 1,200 14,400
5 Personnel 1 1,200 14,400
6 Store man 1 600 7,200
9 Driver 2 800 9,600
10 Messenger 1 350 4,200
11 Guard 3 1,050 12,600
Sub-Total 12 123,600
B. Production
1 Production supervisor 1 1,200 14,400
2 Skilled technician operator 4 2,400 28,800
3 Chemist 1 1,000 12,000
4 Laborer 6 2,100 25,200
Sub-Total 12 80,400
Workers’ Benefit (25%) 51,000
Total 24 255,000

B. TRAINING REQUIREMENT

Workers directly related to production, supervisor, operators and chemist need to be

given on the job training for two weeks by qualified personnel of machinery supplier.
The training cost is estimated to be Birr 30,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the avocado oil for industrial use project is based on the data
presented in the previous chapters and the following assumptions:-
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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 7 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
8.35 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.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Forigin Total

Cost Cost Cost
No.
1 Land lease value 2,076.00 - 2,076.00
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2 Building and Civil Work 1,500.00 - 1,500.00

3 Plant Machinery and Equipment 525.0 2,975.00 3,500.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 621.93 - 621.93
7 Working Capital 108.91 - 108.91
  Total Investment cost 5,381.84 2,975.00 8,356.84

* N.B Pre-production expenditure includes interest during construction ( Birr 491.93

thousand ), training ( Birr 30 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 2.04 million (see
Table 7.2). The raw material cost accounts for 27.61% of the production cost. The
other major components of the production cost are cost of depreciation, financial cost and
repair and maintenance which account for 27.17%, 18.43% and 8.57% respectively. The
remaining 18.23 % is the share of direct labour, utility and other administration cost.

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

Items Cost %
Raw Material and Inputs
564.00 27.61
Utilities 63.76 3.12
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Maintenance and repair

175.00 8.57
Labour direct 153.00 7.49
Labour overheads
63.75 3.12
Administration Costs 91.80 4.49
Land lease cost
- -
Total Operating Costs 1,111.31 54.40
Depreciation 555.00 27.17
Cost of Finance 376.50 18.43
Total Production Cost
2,042.81 100

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 159.50 thousand to
Birr 912 thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 8.69 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.
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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 = 32 %
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
in a bank account. Accordingly, the IRR of this project is computed to be 19.26 %
indicating the viability of the project.

6. Net Present Value

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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 2.83 million, which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 24 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.27 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange earning effect to the country
by export its product to the global market. The project has a backward linkage with
agriculture and a forward linkage with soap and cosmetics industries.