11.

PROFILE ON THE PRODUCTION OF DAIRY

PRODUCTS
 11-2

TABLE OF CONTENTS
PAGE

I. SUMMARY 11-2

II. PRODUCT DESCRIPTION & APPLICATION 11-2

III. MARKET STUDY AND PLANT CAPACITY 11-3

A. MARKET STUDY 11-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 11-9

IV. MATERIALS AND INPUTS 11-10

A. RAW & AUXILIARY MATERIALS 11-10
B. UTILITIES 11-11

V. TECHNOLOGY & ENGINEERING 11-11

A. TECHNOLOGY 11-11
B. ENGINEERING 11-13

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 11-17

A. HUMAN RESOURCE REQUIREMENT 11-17
B. TRAINING REQUIREMENT 11-17

VII. FINANCIAL ANLYSIS 11-18

A. TOTAL INITIAL INVESTMENT COST 11-19
B. PRODUCTION COST 11-20
C. FINANCIAL EVALUATION 11-21
D. ECONOMIC & SOCIAL BENEFITS 11-22
 11-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of dairy products with a
capacity of processing 240,000 liters of raw (whole) milk per annum producing 160,000 liters
of pasteurized milk, 15,000 kilograms of butter, 6,000 kilograms of cheese, and 4,000
kilograms of yoghurt per annum.

The country`s requirement of dairy products is met through local production and import. The
present (2012) unsatisfied demand for pasteurized milk, butter, cheese and yogurt in Addis
Ababa is estimated at 277,290 hl, 3,296 tons, 1,542 tons, and 229 tons respectively. The
unsatisfied demand for the pasteurized milk, butter, cheese and yogurt in Addis Ababa is
projected to reach 519,501 hl, 6,011 tons, 2,783 tons and 415 tons, respectively by 2022.

The principal raw material required is cow milk, which is locally available.

The total investment cost of the project including working capital is estimated at Birr 15.29
million. From the total investment cost the highest share (Birr 12.78 million or 83.59%) is
accounted by fixed investment cost followed by pre operation cost (Birr 1.74 million or
11.40%) and initial working capital (Birr 766.14 thousand or 5.01%). From the total investment
cost Birr 7.08 million or 46.33% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 20.00% and a net
present value (NPV) of Birr 6.65 million discounted at 10%.

The project can create employment for 51 persons. The establishment of such factory will have
a foreign exchange saving effect to the country by substituting the current imports. The project
will also create backward linkage with the livestock sector and also generates income for the
Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Cow milk is white liquid containing water, fats, protein, sugar and ash. It is revealed through
chemical analysis that about 86 - 88% by weight of cow milk is water. A number of products
 11-4

such as pasteurized milk, yogurt, cheese and butter are produced by processing of cow milk.
All these products are consumed by human beings as part of diet on the daily feeding menu.

The main protein of milk is casein which exists as a colloidal suspension and is a good protein
nutritionally. It is prepared from skimmed milk by coagulation with acid or by self souring.
Cow milk contains 2.4 - 6.1% of lactose. Lactose is the characteristic carbohydrate of milk. It
is manufactured from the whey remaining after the manufacture of cheese from milk. Lactose
is a complete food for infants up to 6 months of age; afterwards it acts as supplement to other
foods. One point of milk supplies about 320 cal. of which 50% is contributed by fat 20%
lactose and 21% by protein. Cow milk is also valuable source of phosphorus, calcium and
vitamins. It contains a useful amount of vitamins including vitamin A, thiamin (vitamin B),
riboflavin, pyridoxine (vitamin B6), bistin, pentothenic acid and vitamin D etc.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Dairying is practiced almost all over Ethiopia involving a vast number of small or medium or
large-sized, subsistence or market-oriented farms. Based on climate, land holdings and
integration with crop production as criterion, dairy production systems are recognized in
Ethiopia; namely the rural dairy system which is part of the subsistence farming system and
includes pastoralists, agro-pastoralists, and mixed crop–livestock producers; the peri-urban; and
urban dairy systems. The first system (pastoralism, agro-pastoralism and highland mixed
smallholder production system) were found to contribute to 98%, while the peri-urban and
urban dairy farms produce only 2% of the total milk production of the country (Sintayehu et al
2008).

Demand for standard diary products from the modern sector is met by domestic production and
through import (see Table 3.1 and Table 3.2)

Domestic production of diary products between 2001/02-2009/10 is presented in Table 3.1.

CSA’s Large and Medium Scale Manufacturing and Electricity Industries Survey Report
 11-5

doesn’t provide data on Yogurt. Therefore, it is estimated based on Diary Development

Enterprise’s (DDE) production data of 1980/81-2001/02. Specifically, the average share of
yogurt in 1980/81-2001/02 had been 0.2%. This figure is used to obtain annual production of
yogurt in 2001/02-2009/10 period (by assuming the share was maintained in these years).

Table 3.1
DOMESTIC DIARY PRODUCTION

Year Pasteurized Butter (tons) Cheese Yogurt *

Milk (HL) (tons) (tons)
2001/02 89,382 384 166 18.41
2002/03 107,469 180 140 21.46
2003/04 121,739 339 189 24.64
2004/05 135,077 394 104 27.17
2005/06 162,103 588 122 32.83
2006/07 134,617 354 480 27.75
2007/08 146,291 365 236 29.54
2008/09 160,927 611 270 32.94
2009/10 242,564 982 185 49.33

*Estimated as 0.2% of total annual production of the four diary products (based on DDE data)
Source: - CSA, Large and Medium Scale Manufacturing and Electricity Industries Survey,
Various Issues.

As can be seen from Table 3.1, production of milk, butter, cheese, and yogurt has grown from
89,382 tons, 384 tons, 166 tons and 18 tons in 2001/02 to 242,564 tons, 982 tons, 185 tons, and
49 tons, respectively in 2009/10. The pattern of production of pasteurized milk also showed
generally a rising trend, with brief interruption in the exceptional 2006/07-2007/08 period. In
2008/09 it started to rise again and by 2009/10 climbed to 242,564 HL. The average growth
rate of 2001/02-209/10, which is 15%, has been applied on 2009/10 level to estimate the
production level of pasteurized milk in 2012 which gives is 320,791 HL.
 11-6

Similarly, production of butter has generally been rising with sudden drop in exceptional three
years (2002/03, 2003/04, and 2006/07). Average growth rate of 2001/02-209/10 (24%) has
been applied on 2009/10 level to estimate the production level of in 2012 which gives 1,510
tons. Production of yogurt has also been rising. Hence, average growth rate of 2001/02-209/10
(14%) has been applied on 2009/10 level to estimate the production level of in 2012 which
gives 64 tons. The Production of cheese showed a different pattern (of fluctuation) in the study
period. As a result, last four years average has been taken as 2012 production estimate which is
292 tons.

To meet the unsatisfied demand Ethiopia also imports diary products from abroad. A summary
of the four types of diary products imported during the period 2001 – 2011 is presented in
Table 3.2.
Table 3.2
IMPORT OF DIARY PRODUCTS (TONS)

Year Milk Butter Cheese Yogurt

2001 13.1 4.4 19.1 2.4
2002 21.1 7.0 12.3 0.8
2003 3.8 1.8 19.3 2.6
2004 4.0 11.4 45.3 1.2
2005 17.9 2.1 55.0 4.6
2006 18.3 25.3 58.1 5.1
2007 38.5 16.3 58.1 7.8
2008 322.9 14.2 60.8 8.9
2009 46.3 32.7 70.3 6.8
2010 84.3 3.9 78.5 7.7
2011 165.0 12.8 98.3 11.9

Source:- Ethiopian Revenue and Customs Authority.

It can be seen from Table 3.2 that import of milk which was 13 tons at the beginning of the
period (2001) has grown to 84 tons by the end of the period (2011). Butter, cheese and yogurt
also showed growth from 4 tons, 19 tons, 2 tons to 12.8 tons 98.3 tons 11.9 tons, respectively.
 11-7

Pattern in level of import differed by type of product. Pasteurized milk and butter exhibited
fluctuations whereas import level of cheese and yogurt has more or less been rising (see Table
3.2). Therefore, in estimating the level of import of milk and butter for 2012, the average of last
three years has been taken for milk and butter while for cheese and yogurt the average growth
rate of the 2001-2011 has been applied on 2011 import levels. Accordingly, import level is
estimated at 98.5 tons (or 956 HL), 16.5 tons, 118 tons, and 17.8 tons for milk, butter, cheese
and yogurt, respectively.

To arrive at the aggregate supply or apparent consumption, the level of import and the existing
domestic production have been added. Accordingly, aggregate supply or apparent consumption
of pasteurized milk, butter, cheese, and yogurt (in 2012) is estimated at 321,747 HL, 1,526.5
tones, 410 tons, and 81.8 tons, respectively.

However, these figures are unlikely to reflect the real demand for a number of reasons. First, as
was mentioned earlier a substantial amount of milk is processed outside the modern
establishment where standard procedures, practices and facilities don’t exist. In addition,
studies have shown that there was a shortfall of 76% in milk supply in Addis Ababa alone
(Azage et al 2006). Hence, a better estimate would be to consider African countries’ average
per capita milk consumption. African countries’ average per capita milk consumption is 40 kg
or 38.8 liters (DIARY MAIL AFRICA 2007). According to CSA (2011), the population of
Ethiopia is 82 millions out of which 13.75 million is urban dwellers. This would yield a
demand figure of 5.3 million HL for milk. About 28.8%, 58%, 13.2% and 0.2% of the demand
for milk in urban Ethiopia comes from demand for pasteurized milk, butter , cheese and yogurt,
respectively (based on Feleke and Geda 2001). Hence, the present urban demand for
pasteurized milk and yogurt is 1,526,400 and 1,060 tons, respectively. The milk demand
necessary for preparation of butter and cheese is 3.07 million HL and 699,600 HL respectively.
These needs to be converted into corresponding demand for butter and cheese. 19.38 liters of
Milk is required to make 1Kilogram of Butter and 10 liters of Milk is required to make 1(one)
Kilogram of Cheese. Hence, the present demand for butter and cheese is 15,841 tons, and 6,996
tons respectively. The urban population of Ethiopia is 11,862,821 while that of Addis Ababa is
2,739,551, (CSA 2011). Addis Ababa constitutes about 23% of the total urban population of
 11-8

Ethiopia and processor(s) in Addis Ababa are assumed to capture 23% of the demand likewise.
Hence, the present effective demand for pasteurized milk, butter, cheese and yogurt in Addis
Ababa is 351,072 HL, 3,643 tons, 1,609 tons, and 243.8 tons respectively. On such basis the
unsatisfied present demand for pasteurized milk, butter, cheese and yogurt in Addis Ababa is
277,290 HL, 3,296 tons, 1,542 tons, and 229 tons respectively.

2. Demand Projection

Milk is basic requirement for humans. According to World Health Organization (WHO) milk
consumption of 100 liters per capita is required for healthy life. The demand for pasteurized
milk and other milk products in the end is highly influenced by urban population growth,
income, and favorable change in household attitude towards processed foods.

Current development in the country is characterized by rapid population growth in general and
towns (4.4 %) in particular – one of the fastest in Africa. Similarly, there is a positive per capita
income growth. As a result, the demand for dairy products is increasing as ever. Considering
the combined effect of these factors an annual growth rate of 6% is applied in projecting the
demand for these diary products and for exiting production annual growth rate of 4% is applied.
On this basis the total projected demand in 2013 for pasteurized milk butter, cheese and yogurt
will be 1,617,984 HL, 16,791 tons, 7,416 tons and 1,123 tons respectively. Exiting production
of pasteurized milk butter, cheese and yogurt in 2013 will be 333,622 HL, 1,570 tons, 303 tons,
and 66 tons respectively. This will leave unsatisfied demand of 1,284,362 HL, 15,221 tons,
7113 tons, and 1,057 tons of pasteurized milk butter, cheese and yogurt respectively. The urban
population of Ethiopia is 11,862,821 while that of Addis Ababa is 2,739,551, (CSA, 2011).
Addis Ababa constitutes about 23% of the total urban population of Ethiopia and processor(s)
in Addis Ababa are assumed to capture 23% of the demand likewise. The projected unsatisfied
demand is shown in Table 3.3.
 11-9

Table 3.3

PROJECTED DEMAND FOR DIARY PRODUCTS (2013-2022)

Year Unsatisfied Unsatisfied Unsatisfied Unsatisfied

Demand for Demand for Demand for Demand for
Pasteurized Milk Butter Cheese Yogurt
(HL) (tons) (tons) (tons)
2013 295,403 3,501 1,636 243
2014 314,662 3,718 1,736 258
2015 335,138 3,949 1,841 274
2016 356,906 4,193 1,953 291
2017 380,047 4,453 2,072 308
2018 404,645 4,729 2,198 327
2019 430,791 5,021 2,331 347
2020 458,580 5,332 2,473 368
2021 488,114 5,661 2,623 391
2022 519,501 6,011 2,783 415

3. Pricing and Distribution

Milk, butter, cheese, and yogurt are retailed in super markets on average at Birr 20 per liter,
Birr 155 per kg, Birr 150 per kg and Birr 34 per liter, respectively.

Allowing 25% for retail margin for distributors and retailers, a price of Birr 16 per liter, Birr
124 per kg, Birr 120 per kg, and Birr 27.20 per liter, is recommended for milk, butter, cheese
and yoghurt, respectively.

Distribution of the products could be undertaken through small retail outlets such as shops as
well as supermarkets and catering establishments.
 11-10

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

Based on the projection of unsatisfied demand for dairy products in the market study and the
minimum economic scale of production, the envisaged plant will have a capacity of processing
240,000 liters of raw (whole) milk per annum producing 160,000 liters of pasteurized milk,
15,000 kilograms of butter, 6,000 kilograms of cheese, and 4,000 kilograms of yoghurt per
annum at full operation capacity. This capacity is proposed on the basis of two shifts of 8 hours
per day and 300 working days per annum.

2. Production Program

With an assumption that enough time, during the initial production period, will be required for
market penetration and technical skill development, the envisaged plant will start production at
85% of its installed capacity which will grow to 90% in the second year. Full capacity
production will be attained in the third year and onwards. Details of the annual production
program along with the product mix are shown in Table 3.4

Table 3.4

ANNUAL PRODUCTION PROGRAM

Sr. Description Unit of Production Year

No. Measur 1st 2nd 3rd &
e Onwards
1 Pasteurized milk lt 136,000 144,000 160,000
2 Butter kg 12,750 13,500 15,000
3 Cheese kg 5,100 5,400 6,000
4 Yoghurt lt 3,400 3,600 4,000
5 Capacity % 85 90 100
utilization rate
 11-11

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The principal raw material required for the production of pasteurized milk, butter, cheese and
yoghurt is raw (whole) cow milk. In addition, small quantities of coagulation enzymes and salt
are also required for the production process. The raw (whole) cow milk and salt are available
locally while the coagulation enzymes have to be imported. Details of annual requirement for
raw materials at 100% capacity utilization of the plant and the estimated costs are shown in
Table 4.1.
Table 4.1

ANNUAL RAW MATERIALS REQUIREMENT AND COSTS

Unit Cost ('000 Birr)

Sr. Descriptio Unit of Require
Price,
No. n Measure d Qty F. C. L.C. Total
Birr/Unit
Cow whole
1 lt 240,000 9.00 2,160.00 2,160.00
(raw) milk
2 Salt kg 210 2.50 0.53 0.52
Milk
3 coagulation kg 1,830 29.00 42.456 10.61 53.07
enzymes
Total 42.456 2,171.13 2,213.59

The auxiliary materials required for the envisaged plant comprise packing materials like 200 cc
plastic bags, 40 gm glycine paper and carton box. The plastic bags and carton boxes can be
acquired from the local market while the glycine paper has to be imported. The annual
requirement for auxiliary materials at full capacity of the envisaged plant and the estimated
costs are indicated in Table 4.2.
 11-12

Table 4.2

ANNUAL AUXILIARY MATERIALS REQUIREMENT AND COST

Sr. Description Unit of Required Unit Cost ('000 Birr)

No. Measur Qty. Price, F. C. L.C. Total
e Birr/Unit
1 200 cc pc 800,000 0.65 520.00 520.00
Plastic bag
2 400 gm kg 58.2 232 10.802 2.70 13.50
Glycine
paper
3 Caton box pc 24,000 4.00 96.00 96.00
Total 10.80192 618.70 629.50

B. UTILITIES

The major utilities required by the envisaged project are electric power, water and fuel oil. The
annual requirement for utilities and the estimated costs is indicated in Table 4.3.

Table 4.3

ANNUAL UTILITIES REQUIREMENT AT FULL CAPACITY AND COST

Sr. Description Unit of Required Unit Cost, ('000 Birr)

No Measure Qty Price,
. Birr/Uni F.C. L.C.
t
1 Electric power kWh 18,850 0.5778   10.89
2 Water m3 1,630 10.00   16.30
3 Fuel oil lt 23,260 14.34   333.54
Total   360.73

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description
 11-13

Processing of raw milk mainly involves heat treatment operation usually known as
pasteurization and sterilization. These processes are discussed in detail as follows.

A weighed amount of raw milk is pumped to a clarifier by means of the milk pump, where it is
removed of microscopic impurities. Clarified milk is next sent to the cooler where it is cooled
to about 2-5oC, then pumped to the storage tank.

The milk is, then, preheated and pasteurized to a temperature of about 80 oC by heat exchange.
Further, by the effect of ultra-high temperature sterilizer, the fatty ingredients are homogenized
in the homogenizer and recycled to the ultra-high temperature sterilizer where it is pasteurized
instantly in about 2 seconds at high temperature of 135oC.

Finally, cooling is achieved by means of chilled water to lower the temperature to 3 oC, after
which the milk is stored in the surge tank for filling into suitable containers for various uses.
After such a process, a specified quantity of the milk is sold as a pasteurized product while the
remaining portion is further processed in the plant for the production of other milk products
such as butter and cheese. The details of the production processes are stated as follows.

Whole milk is partially or totally separated to produce standardized whole milk with 3.25%
milk fat, low fat milks, 1 - 2% milk fat, and skim milk. After separation, cream is held in
stainless steel tanks and refrigerated at (4 - 7oC).

The separated cream is pasteurized in order to destroy bacteria. Following pasteurization, rapid
cooling is conducted to facilitate the formation of butter by a churning process. By continuous
churning, the entering cream will be pasteurized giving tempered cream which is further
agitated vigorously by beater bars. This action causes stripping of the fat globule membrane
and aggregation of the fat into chunks. Finally, a continuous ribbon of yellow butter streams
from the end of the continuous churn. Butter as a product drops into a hopper, where it is
transferred to packing machinery.

Cheese is made from pasteurized skim milk, and in form of discrete particles classified as small
or large curd. A curd forms when the increasing lactic acid of milk during fermentation attains
the isoclectric point of casein at pH 4.6. This soft curd additionally contains lactose, salt and
water. Latter, the curd matrix is cut and cooked to about 126 oF (52oC). Separation of whey
 11-14

from the curd is rapid, and is followed by two or three water washings at warm to chill
temperatures. Washing removes whey from residues and acts as a cooking medium. After
drainage of the last wash water, the chilled curd is blended with a viscous, salted cream
dressing to give 4.2% fat and 1% salt, and is packaged.

2. Environmental Impact

The dairy products plant does not have any pollutant emitted from the production process,
except the washing water which has to be connected to appropriate sewerage line to get rid of.
Thus, the envisaged project is environment friendly.

B. ENGINEERING

1. Machinery and Equipment

The list of plant machinery and equipment required for the envisaged project and the estimated
costs are given in Table 5.1.

Table 5.1

MACHINERY AND EQUIPMENT AND ESTIMATED COSTS

Sr. Description Unit of Require Cost, ('000 Birr)

No. Measure d Qty F.C. L.C. Total
1 Milk collecting tank with weighing set 1 354.20 88.55 442.75
scale
2 SS Milk storage tank set 2 425.04 106.26 531.30
3 Plate type pasteurizer set 1 425.04 106.26 531.30
4 Cream separator set 1 354.20 88.55 442.75
5 SS Cream storage tank set 1 283.36 70.84 354.20
6 Refrigeration system set 1 354.20 88.55 442.75
7 Aluminum can, 50 liter set 65 425.04 106.26 531.30
8 SS Milk pump set 2 283.36 70.84 354.20
9 SS Steam jacketed kettle and set 3 425.04 106.26 531.30
accessories
10 Filter press, plate and frame type set 2 354.20 88.55 442.75
11 Acid mixing tank, 200 liter set 2 283.36 70.84 354.20
12 Whey separator set 1 212.52 53.13 265.65
 11-15

Sr. Description Unit of Require Cost, ('000 Birr)

No. Measure d Qty F.C. L.C. Total
13 Washing tank set 2 212.52 53.13 265.65
14 Dewatering unit set 1 283.36 70.84 354.20
15 Dryer, 48 trays set 2 354.20 88.55 442.75
16 Sizing unit set 1 283.36 70.84 354.20
17 Vacuum crystallizer, 200 liters set 1 425.04 106.26 531.30
18 Centrifuge, continuous type set 1 425.04 106.26 531.30
19 Steam boiler set 495.88 123.97 619.85
20 Pipes; fittings; weighing, testing & set 1 425.04 106.26 531.30
material handling equip/t
7,084.0 1,771.0 8,855.0
Total 0 0 0

2. Land, Buildings and Civil Works

Total land area required is 1,000 square meters out of which 600 square meters are built – up
area. The construction cost of buildings and civil works at a rate of Birr 4,500 per m 2 is
estimated at Birr 2.7 million.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation No
721/2004) 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
 11-16

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 below
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.

Moreover, the Addis Ababa City Administration has recently adopted a new land lease floor
price for plots in the city. The new prices will be used as a benchmark for plots that are going
to be auctioned by the city government or transferred under the new “Urban Lands Lease
Holding Proclamation.”

The new regulation classified the city into three zones. The first Zone is Central Market District
Zone, which is classified in five levels and the floor land lease price ranges from Birr 1,686 to
Birr 894 per m2. The rate for Central Market District Zone will be applicable in most areas of
the city that are considered to be main business areas that entertain high level of business
activities.

The second zone, Transitional Zone, will also have five levels and the floor land lease price
ranges from Birr 1,035 to Birr 555 per m 2 .This zone includes places that are surrounding the
city and are occupied by mainly residential units and industries.
 11-17

The last and the third zone, Expansion Zone, is classified into four levels and covers areas that
are considered to be in the outskirts of the city, where the city is expected to expand in the
future. The floor land lease price in the Expansion Zone ranges from Birr 355 to Birr 191 per
m2 (see Table 5.2).
Table 5.2
NEW LAND LEASE FLOOR PRICE FOR PLOTS IN ADDIS ABABA

Floor
Zone Level price/m2
1st 1686
2nd 1535
Central Market
District 3rd 1323
4th 1085
5th 894
1st 1035
2nd 935
Transitional zone 3rd 809
4th 685
5th 555
1st 355
2nd 299
Expansion zone
3rd 217
4th 191

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all
new manufacturing projects will be located in industrial zones located in expansion zones.
Therefore, for the profile a land lease rate of Birr 266 per m 2 which is equivalent to the average
floor price of plots located in expansion zone 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
 11-18

exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.

Table 5.3
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%

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 land lease period for industry
is 60 years.

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 266,000 of
which 10% or Birr 26,600 will be paid in advance. The remaining Birr 239,400 will be paid in
equal installments with in 28 years i.e. Birr 8,550 annually.

VI. HUMAN RESOURCE AND TRAINING REQUIREMENT

A. HUMAN RESOURCE REQUIREMENT

The total human resource required for the envisaged plant is 51 persons. Details of human
resource requirement and the estimated annual labor cost including fringe benefits are shown in
Table 6.1.

B. TRAINING REQUIREMENT

The production supervisor, the quality controller, 14 operators, 2 mechanics, and 2 electricians
should be given a two weeks on – the - job training during commissioning by an advanced
technician of equipment supplier. The total training cost is estimated at Birr 170,000
 11-19

Table 6.1
HUMAN RESOURCE REQUIREMENT AND ESTIMATED COST

Required Salary, Birr

Sr.
Job Title No. of
No.
Persons Monthly Annual
1 Plant manager 1 4,500 54,000
2 Secretary 1 800 9,600
3 Personnel 1 850 10,200
4 Accountant - clerk 1 850 10,200
5 Cashier 1 800 9,600
6 Sales person 1 800 9,600
7 Purchaser 1 800 9,600
8 Store keeper 1 800 9,600
9 Production and technique head 1 1,800 21,600
10 Quality controller (chemist) 2 1,500 18,000
11 Production supervisor 1 1,200 14,400
12 Mechanic 2 1,700 20,400
13 Electrician 2 1,700 20,400
14 Operator 14 7,000 84,000
15 Laborer 16 6,400 76,800
16 Driver 2 1,500 18,000
17 Guard 3 1,200 14,400
Sub -total 51 34,200 410,400
Fringe benefits (20% Basic salary) 6840 82,080
Grand Total   41,040 492,480

VII. FINANCIAL ANALYSIS

The financial analysis of the dairy products 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 5 years
 11-20

Bank interest 10%

Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 day
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 15.29
million (See Table 7.1). From the total investment cost the highest share (Birr 12.78 million or
83.59%) is accounted by fixed investment cost followed by pre operation cost (Birr 1.74
million or 11.40%) and initial working capital (Birr 766.14 thousand or 5.01%). From the total
investment cost Birr 7.08 million or 46.33% is required in foreign currency.

Table 7.1

INITIAL INVESTMENT COST (‘000 Birr)

Local Foreign Total %

Sr. No Cost Items Cost Cost Cost Share
1 Fixed investment        
1.1 Land Lease 26.60   26.60 0.17
1.2 Building and civil work 2,700.00   2,700.00 17.66
7,084.0
1.3 Machinery and equipment 1,771.00 0 8,855.00 57.91
1.4 Vehicles 900.00   900.00 5.89
1.5 Office furniture and equipment 300.00   300.00 1.96
  Sub total 5,697.60 7,084.00 12,781.60 83.59
2 Pre operating cost *        
2.1 Pre operating cost 742.75   742.75 4.86
2.2 Interest during construction 1,000.33   1,000.33 6.54
  Sub total 1,743.08   1,743.08 11.40
3 Working capital ** 766.14   766.14 5.01
  Grand Total 8,206.82 7,084.00 15,290.82 100
 11-21

* N.B Pre operating cost include project implementation cost such as installation, startup,
commissioning, project engineering, project management etc and capitalized interest during
construction.

** The total working capital required at full capacity operation is Birr 1.06 million. However,
only the initial working capital of Birr 915.76 thousand during the first year of production is
assumed to be funded through external sources. During the remaining years the working
capital requirement will be financed by funds to be generated internally (for detail working
capital requirement see Appendix 7.A.1).

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 7.41 million (see
Table 7.2). The cost of raw material account for 38.36% of the production cost. The other
major components of the production cost are depreciation, financial cost and labor, which
account for 30.19%, 12.99% and 5.54%, respectively. The remaining 12.92% is the share of
utility, repair and maintenance, labor overhead and administration cost. For detail production
cost see Appendix 7.A.2.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE)

Items
Cost %
Raw Material and Inputs 2,843.09 38.36
Utilities 360.74 4.87
Maintenance and repair 265.65 3.58
Labour direct 410.40 5.54
Labour overheads 82.08 1.11
Administration Costs 100.00 1.35
Land lease cost - -
Cost of marketing and distribution 150.00 2.02
Total Operating Costs 4,211.96 56.82
Depreciation 2,237.55 30.19
Cost of Finance 962.82 12.99
 11-22

Total Production Cost 7,412.33 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit throughout its
operation life. Annual net profit after tax will grow from Birr 291thousand to Birr 2.33 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 18.17 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.

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

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 for capacity utilization and sales value estimated by using income statement projection
are computed as followed.

Break- Even Sales Value = Fixed Cost + Financial Cost = Birr 3,229,800
Variable Margin ratio (%)

Break- Even Capacity utilization = Break -even Sales Value X 100 = 65.81%
Sales revenue
 11-23

4. Pay-back Period

The pay-back period, also called pay – off period is defined as the period required for
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 project is computed to be 20.00% indicating the viability 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 principle, a project is
accepted if the NPV is non-negative. Accordingly, the net present value of the project at 10%
discount rate is found to be Birr 6.65 million which is acceptable. For detail discounted cash
flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

The project can create employment for 51 persons. The project will generate Birr 4.87 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 will also create backward
 11-24

linkage with the livestock sector and also generates income for the Government in terms of
payroll tax.

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 11-24

Appendix 7.A.1
NET WORKING CAPITAL ( in 000 Birr)

Items Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Total inventory 533.08 604.16 710.77 710.77 710.77 710.77 710.77 710.77 710.77 710.77

Accounts receivable 266.37 300.22 351.00 351.00 351.71 351.71 351.71 351.71 351.71 351.71

Cash-in-hand 8.94 10.13 11.92 11.92 12.04 12.04 12.04 12.04 12.04 12.04

CURRENT ASSETS 808.39 914.51 1,073.69 1,073.69 1,074.52 1,074.52 1,074.52 1,074.52 1,074.52 1,074.52

Accounts payable 42.25 47.89 56.34 56.34 56.34 56.34 56.34 56.34 56.34 56.34

CURRENT LIABILITIES 42.25 47.89 56.34 56.34 56.34 56.34 56.34 56.34 56.34 56.34
TOTAL WORKING
CAPITAL 766.14 866.62 1,017.35 1,017.35 1,018.18 1,018.18 1,018.18 1,018.18 1,018.18 1,018.18
 11-25

Appendix 7.A.2
PRODUCTION COST ( in 000 Birr)

Item Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

Raw Material and Inputs 2,132 2,417 2,843 2,843 2,843 2,843 2,843 2,843 2,843 2,843

Utilities 271 307 361 361 361 361 361 361 361 361

Maintenance and repair 199 226 266 266 266 266 266 266 266 266

Labour direct 308 349 410 410 410 410 410 410 410 410

Labour overheads 62 70 82 82 82 82 82 82 82 82

Administration Costs 75 85 100 100 100 100 100 100 100 100

Land lease cost 0 0 0 0 8.55 8.55 8.55 8.55 8.55 8.55

Cost of marketing
and distribution 150 150 150 150 150 150 150 150 150 150

Total Operating Costs 3,196 3,603 4,212 4,212 4,221 4,221 4,221 4,221 4,221 4,221

Depreciation 2,238 2,238 2,238 2,238 2,238 138 138 138 138 138

Cost of Finance 0 1,100 963 825 688 550 413 275 138 0

Total Production Cost 5,434 6,941 7,412 7,275 7,146 4,909 4,771 4,634 4,496 4,359
 11-26

Appendix 7.A.3
INCOME STATEMENT ( in 000 Birr)

Year Year Year Year Year Year Year Year

Item 2 3 4 5 6 7 8 9 Year 10 Year 11

Sales revenue 6,921 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690
Less variable costs 3,046 3,453 4,062 4,062 4,062 4,062 4,062 4,062 4,062 4,062

VARIABLE MARGIN 3,875 4,237 3,628 3,628 3,628 3,628 3,628 3,628 3,628 3,628
in % of sales revenue 55.98 55.10 47.18 47.18 47.18 47.18 47.18 47.18 47.18 47.18
Less fixed costs 2,388 2,388 2,388 2,388 2,396 297 297 297 297 297

OPERATIONAL MARGIN 1,487 1,850 1,240 1,240 1,232 3,331 3,331 3,331 3,331 3,331
in % of sales revenue 21.49 24.05 16.13 16.13 16.02 43.32 43.32 43.32 43.32 43.32
Financial costs   1,100 963 825 688 550 413 275 138 0
GROSS PROFIT 1,487 749 278 415 544 2,781 2,919 3,056 3,194 3,331
in % of sales revenue 21.49 9.75 3.61 5.40 7.08 36.17 37.96 39.75 41.53 43.32
Income (corporate) tax 0 0 0 125 163 834 876 917 958 999
NET PROFIT 1,487 749 278 291 381 1,947 2,043 2,139 2,236 2,332
in % of sales revenue 21.49 9.75 3.61 3.78 4.95 25.32 26.57 27.82 29.07 30.33
 11-27

Appendix 7.A.4
CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr)

Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Scrap
TOTAL CASH INFLOW 13,524 8,730 7,696 7,698 7,690 7,690 7,690 7,690 7,690 7,690 7,690 3,665
Inflow funds 13,524 1,809 6 8 0 0 0 0 0 0 0 0
Inflow operation 0 6,921 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 0
Other income 0 0 0 0 0 0 0 0 0 0 0 3,665
TOTAL CASH
OUTFLOW 13,524 5,005 6,185 6,709 6,537 6,448 6,981 6,884 6,788 6,692 5,220 0
Increase in fixed assets 13,524 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 808 106 159 0 1 0 0 0 0 0 0
Operating costs 0 3,046 3,453 4,062 4,062 4,071 4,071 4,071 4,071 4,071 4,071 0
Marketing and
Distribution cost 0 150 150 150 150 150 150 150 150 150 150 0
Income tax 0 0 0 0 125 163 834 876 917 958 999 0
Financial costs 0 1,000 1,100 963 825 688 550 413 275 138 0 0
Loan repayment 0 0 1,375 1,375 1,375 1,375 1,375 1,375 1,375 1,375 0 0
SURPLUS (DEFICIT) 0 3,725 1,511 989 1,153 1,242 709 806 902 998 2,470 3,665
CUMULATIVE CASH
BALANCE 0 3,725 5,236 6,225 7,377 8,620 9,329 10,135 11,037 12,035 14,505 18,170

Appendix 7.A.5
 11-28

DISCOUNTED CASH FLOW ( in 000 Birr)

Year Year Year Year Year Year Scra

Item Year 1 2 Year 3 4 Year 5 6 7 8 Year 9 10 Year 11 p
TOTAL CASH INFLOW 0 6,921 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 3,665
Inflow operation 0 6,921 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 7,690 0
Other income 0 0 0 0 0 0 0 0 0 0 0 3,665

TOTAL CASH OUTFLOW 14,290 3,297 3,753 4,212 4,337 4,384 5,055 5,096 5,137 5,179 5,220 0
Increase in fixed assets 13,524 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 766 100 151 0 1 0 0 0 0 0 0 0
Operating costs 0 3,046 3,453 4,062 4,062 4,071 4,071 4,071 4,071 4,071 4,071 0

Marketing and Distribution cost 0 150 150 150 150 150 150 150 150 150 150 0
Income (corporate) tax   0 0 0 125 163 834 876 917 958 999 0

NET CASH FLOW -14,290 3,624 3,937 3,478 3,353 3,306 2,635 2,594 2,553 2,511 2,470 3,665
- 19,83
CUMULATIVE NET CASH FLOW -14,290 10,666 -6,730 -3,252 101 3,407 6,042 8,636 11,189 13,700 16,170 5
Net present value -14,290 3,295 3,253 2,613 2,290 2,053 1,487 1,331 1,191 1,065 952 1,413
-
Cumulative net present value -14,290 10,996 -7,743 -5,129 -2,840 -787 701 2,032 3,223 4,288 5,240 6,653

NET PRESENT VALUE 6,653

INTERNAL RATE OF RETURN 20.00%
NORMAL PAYBACK 6 years