7.

PROFILE ON THE PRODUCTION OF CHEWING

GUM, CHOCOLATE AND HARD CANDY
 7-1

TABLE OF CONTENTS

PAGE

I. SUMMARY 7-2

II. PRODUCT DESCRIPTION & APPLICATION 7-3

III. MARKET STUDY AND PLANT CAPACITY 7-3

A. MARKET STUDY 7-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 7-8

IV. MATERIALS AND INPUTS 7-9

A. RAW & AUXILIARY MATERIALS 7-9
B. UTILITIES 7-10

V. TECHNOLOGY & ENGINEERING 7-11

A. TECHNOLOGY 7-11
B. ENGINEERING 7-12

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 7-16

A. HUMAN RESOURCE REQUIREMENT 7-16
B. TRAINING REQUIREMENT 7-17

VII. FINANCIAL ANLYSIS 7-18

A. TOTAL INITIAL INVESTMENT COST 7-18
B. PRODUCTION COST 7-19
C. FINANCIAL EVALUATION 7-20
D. ECONOMIC & SOCIAL BENEFITS 7-22
 7-2

I. SUMMARY

This profile envisages the establishment of a plant for the production of chewing gum
chocolate and hard candy with a capacity of 300 tons per annum. Chewing gum is a product of
gelatin, sugar, glucose and other additives which produce a good flavor. Chocolate bar is a
confection in bar form while a hard candy is made of sugar and corn syrup boiled without
crystallizing.

The country`s requirement of hard candy is met through local production and import while the
requirement for chewing gum and chocolate is met through import. The present (2012)
unsatisfied demand for chewing gum chocolate and hard candy is estimated at 2,530 tons. The
demand for the products is projected to reach 6,912 tons and 12,243 tons by the years 2017 and
2022, respectively.

The principal raw materials required for the manufacture of chewing gum are gum base,
powdered sugar, glucose, edible colors and flavors. Cocoa solids and/or cocoa butter and milk
are required for the manufacture of chocolate bars. The production of hard candies requires
sugar, glucose, edible colors and flavors. Except sugar which is available locally the other raw
materials have to be imported.

The total investment cost of the project is estimated at Birr 24.63 million. From the total
investment cost the highest share (Birr 20.27 million or 82.30%) is accounted fixed investment
cost followed by pre operation cost (Birr 2.56 million or 10.42%) and initial working capital
(Birr 1.79 million or 7.28%). From the total investment cost Birr 9.99 million or 40.57% is
required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 31.74% and a net
present value (NPV) of Birr 26.01 million, discounted at 10%.

The project can create employment for 37 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 sugar producers and also generates income for the
Government in terms of tax revenue and payroll tax.
 7-3

II. PRODUCT DESCRIPTION AND APPLICATION

Chewing gum is a product of gelatin, sugar, glucose and other additives which produce a good
flavor. Chocolate bar is a confection in bar form which comprises some or all of the
components like cocoa solids, cocoa butter, and sugar, milk while a hard candy is made of
sugar and corn syrup boiled without crystallizing.

Candy is shaped piece of cooked and flavored sugar, syrup, etc usually with coffee, mint, fruit
juices, milk, nuts, etc added. It is recognized generally as an important ingredient of a balanced
diet. Candy is well known in replacing the energy which the human body continuously spends
through physical exertion.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Demand for chewing gum and chocolate bar is entirely met through import. But the demand for
candy is met through domestic production and imports (Tables 3.1&3.2). Industry sources have
also indicated that there has been some amount of illicit import of these items. However, it was
not possible to quantify it.

There is no disaggregated data on domestic production of candy. The Production of sweets

(made of sugar) lumped together over the years 2001/02-2009/10 is available and is shown in
Table 3. 1.
 7-4

Table 3.1
DOMESTIC PRODUCTION OF SWEETS (TONS)

Year Production
2001/02 1,405
2002/03 992
2003/04 1,460
2004/05 1,103
2005/06 1,838
2006/0707 4,773
2007/08 4,171
2008/09 5,428
2009/10 14,625

Source: - CSA, Large and Medium Scale Manufacturing and Electricity Industries Survey,
Various Issues.

The pattern of domestic production of sweets is marked by general rise. The yearly average
level of production which amounted at 1,240 tones during the period 2001/02--2004/05 grew to
1,838 by 2005/06. A substantial domestic production of sweets is observed during the period
2006/07 to 2009/10. The yearly average local production during 2006/07--2008/09 has reached
4,791 tones. Compared to the previous three years it has grown by 2.6 fold. The production
level achieved during 2009/10 is exceptionally very high, which stood at 14,625 tones. This
figure is three times higher compared to the yearly average production of the previous three
years i.e. year 2006/07--2008/09. This huge increase is believed to be due to the establishment
of new plants and improved capacity utilization of the existing plants. All in all production
during the past nine years has grown by an annual average of 57 %. Since this is a huge figure
due to the reasons mentioned above only a 10% yearly growth rate has been applied on 2009/10
production to estimate production in 2012. Accordingly, domestic production of sweets in 2012
was estimated at 17,696 tons.

Import of sweets has been also considered in this study. The trend of import during the period
2001– 2011 is shown in Table 3.2.
 7-5

Table 3.2

IMPORT OF SWEETS (SWEETENED CHEWING GUM, CHOCOLATE BAR AND

HARD CANDY) (IN TONS)

Year Sweetened Chocolate Hard Total

Chewing Bar Candy
Gum
2001 678 8 502 1,188
2002 488 30 494 1,012
2003 1,000 1,015 762 2,777
2004 1,432 79 516 2,027
2005 3,114. 232 695 4,041
2006 2,418 187 1,124 3,729
2007 2,563 137 1,353 4,053
2008 2,221 134 1,425 3,780
2009 1,385 165 66 1,616
2010 1,021 130 1,446 2,597
2011 1,023 167 937 2,127

Source: - Ethiopian Revenue and Customs Authority.

Overall import in the period of analyses swings up and down with a relatively increasing trend
from year 2001 to year 2007 and a declining trend during the last four years i.e. 2008--2011.
For example, import which was around 1,000 tons in the years 2001 and 2002 has increased to
a yearly average of about 2,400 tons during the years of 2003-2004. A modest growth is
observed during the following four years of 2005--2008, where annual average import is near
to 4,000 tons. This is higher by about 66% compared to the previous two years average. But
during the period 2008--2011 the yearly average level of import has declined to about 2,113
tones, which is almost half of the previous four years annual average.
 7-6

Due to the fluctuations observed throughout the period, it was found important to consider the
average of the most recent 4 years covered by the data set to arrive at the 2012 import estimate.
Accordingly, the sweet (Sweetened Chewing Gum, Chocolate Bar and Hard Candy) import was
estimated at 2,530 tons.

Therefore, summing up the domestic production and imports the total or apparent consumption
of sweets (containing sweetened chewing gum, chocolate bar and hard candy) will be 20,226
tons. This figure has been taken as the present effective demand for 2012.

2. Demand Projection

The consumption of sweetened chewing gum, chocolate bar and hard candy is related with
population growth and taste for the products. Hence, the urban population growth rate of 4% is
used in projecting future demand. Existing domestic producers is assumed to maintain the 2012
level of production. This results in projected demand figure of 21,035 tons for sweets in 2013
of which 17,696 tons will be satisfied by existing domestic producers and leaving 3,339 tones
to be filled in. Furthermore, based on information from industry operators the share of
sweetened chewing gum, chocolate bar and hard candy is assumed to constitute 30 %, 25 %,
and 45 % of total demand, respectively. The resulting figures for the total projected unsatisfied
demand and the share of each product type are indicated in Table 3.3.
 7-7

Table 3.3

PROJECTED DEMAND FOR SWEETENED CHEWING GUM,

CHOCOLATE BAR AND HARD CANDY (TONS)

Year Projected Projected Projected Projected

Unsatisfied Unsatisfied Unsatisfied Unsatisfied
Demand Demand Demand Demand
For For For For
Sweets Sweetened Chocolate Hard
Chewing Bar Candy
Gum

2013 3,339 1,002 835 1,502

2014 4,180 1,254 1,045 1,881
2015 5,055 1,516 1,264 2,275
2016 5,966 1,789 1,491 2,686
2017 6,912 2,073 1,728 3,111
2018 7,896 2,369 1,974 3,553
2019 8,920 2,676 2,230 4,014
2020 9,985 2,995 2,496 4,494
2021 11,092 3,327 2,773 4,992
2022 12,243 3,673 3,061 5,509

3. Pricing and Distribution

Current average retail price of sweetened chewing gum, chocolate bar and hard candy is Birr 3
per pack (containing 5 units), Birr 129 for 450gm and Birr 219 for 750 gm. Allowing margin
30% for whole sellers and retailers Birr 2.30 per pack of 5 units of chewing gum, Birr 99.20 for
450gm of chocolate, and Birr 168.50 for 750 gm of candy is recommended for this project.

The product is one consumed on convenience basis including on the streets. So it needs to
stretch the supply chain up to the final consumer in so many places. It can therefore find its
market outlet through network including whole sellers, supermarkets, general merchandise
shops, and street vendors.
 7-8

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

Based on the unsatisfied demand forecast in the market study, capital requirement and
minimum economy of scale, the production capacity of the envisaged plant is proposed to be
300 tons of sweet products which comprise 75 tons of chewing gum, 45 tons of chocolate bars,
and 180 tons of hard candy per annum. This capacity will be attained by working single shift of
8 hours per day and 300 working days per annum.

2. Production Program

The annual production program is formulated on the basis of the market forecast and selected
plant capacity. It is assumed that production will commence at 80% of the installed capacity
which will grow to 90% in the second year. Full production capacity will be attained in the
third year and onwards. Details of annual production program are shown in Table 3.3.

Table 3.3

ANNUAL PRODUCTION PROGRAM

Sr. Description Unit of Production Year

No. Measure 1st 2nd 3rd &
Onwards
1 Chewing gum Ton 60.0 67.5 75
2 Chocolate bars Ton 36.0 40.5 45
3 Hard candy Ton 144.0 162.0 180
Total sweet products Ton 240.0 270.0 300
4 Capacity utilization % 80 90 100
rate
 7-9

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The major raw materials required for the manufacture of chewing gum are gum base, powdered
sugar, glucose, edible colors and flavors. Cocoa solids and/or cocoa butter and milk are used
for the manufacture of chocolate bars. The production of hard candies also requires sugar,
glucose, edible colors and flavors.

Various types of candies do exist depending on the ingredients used and manufacturing process
employed. The envisaged plant will produce hard candies which can be identified by their hard
brittle texture. In addition to sugar which is the major raw material used to produce hard
candy, auxiliary materials like liquid glucose (corn syrup) are also used as additives. Liquid
glucose is used as a "doctor". Without liquid glucose, the sugar would crystallize and turn into
a lump of cloudy mass, shortly after it was poured. Sugar, the main raw material required for
the production process, can be obtained locally from the existing sugar factories while the other
raw materials which are required in small quantities have to be imported. The annual
requirement for raw materials at full capacity production of the plant along with the estimated
costs is given in Table 4.1.
 7-10

Table 4.1

ANNUAL RAW MATERIALS REQUIREMENT AND COST(TONS)

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

No. Qty. Birr/Unit F. C. L.C. Total
A. Chewing gum
1 Gum base (20%) 16 39,000 499.20 124.80 624.00
2 Sugar (60%) 49.5 14,000 693.00 693.00
3 Glucose (19%) 15.68 3,445 43.21 10.80 54.02
4 Edible color and flavor 0.75 36,000 21.60 5.40 27.00
B. Chocolate bar
5 Cocoa solids 9.90 40,500 320.76 80.19 400.95
6 Cocoa butter 9.41 42,000 316.18 79.04 395.22
7 Sugar 29.70 14,000 415.80 415.80
8 Edible color and flavor 0.45 36,000 12.96 3.24 16.20
C .Hard candy
9 Sugar 198 14,000 2,772.00 2,772.00
10 Glucose 37.62 3,445 103.68 25.92 129.60
11 Edible color and flavor 36,000 51.84 12.96 64.80 77.76
Grand Total 1,330.55 4,274.99 5,605.55

The auxiliary materials required for the envisaged project are mainly packing materials like
wrapping paper, aluminum foil and polyethylene sheet. The estimated annual cost of packing
materials at lump sum required for full capacity production of the plant amounts to Birr
108,000.

B. UTILITIES

Electric power, water and furnace oil are the utilities required by the envisaged plant. Annual
cost of utilities is estimated at Birr 1,962,921. The annual requirement for utilities at full
capacity production of the plant and the estimated costs are given in Table 4.2.
 7-11

Table 4.2

ANNUAL UTILITIES REQUIREMENT AND COST

Sr.No. Description Unit of Required Unit Cost, ('000 Birr)

Measure Qty Price, F.C. L.C. Total
Birr/Unit
1 Electric kWh 26,100 0.5778 15.08 15.08
power
2 Water m3 14,100 10.00 141.00 141.00
3 Furnace oil lt 126,000 14.34 1,806.84 1,806.80
Total 1,962.92 1,962.92

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The chewing – gum base is pre – heated and mixed with other ingredients in a kneading
machine. The mix then passes through a pre – extruder where a strip of chewing gum is
extruded. The strip is then cut into plates and conveyed to the second extruder where it comes
out being powered with sugar on both sides. The powder is pressed to the strip by rollers and
transferred to size reducing rollers. A brushing device removes loose powder sugar from the
strip. Lastly, the final size of the strip is achieved, and it is stored in an air – conditioned room
for a recommended interval and then cut to sizes and packed.

Broadly speaking there are two processes for making candies - the conventional process which
heats materials, and the one for boiling down through reduced pressure (vacuum system). The
latter process is proposed for the envisaged project since it is modern and rationalized in every
aspect. The process features; small consumption of fuel, small size of plant, economization on
wages and if required more transparent candies can be produced. These features provide better
taste, long shelf life, and uniformity of quality, with mass production available.
 7-12

The process is roughly divided into two units, namely, one to concentrate the material and the
other to form hard candies. The process of vacuum concentration unit is to evaporate material
under reduced temperature with reduced pressure. The candy material taken out of the
concentrator is then mixed with various additives, spices or unique flavors according to the
desire of candy makers. The mixing process requires sufficient kneading to obtain excellent
products. After kneading is sufficiently carried out, the candy is drawn out in rope shape of
determined measure by the batch roller (set with sizing roller). The drawn candy is then put
into the hard candy forming unit, where candies are made formed. The formed candies are
finally cooled down to normal temperature and charged to the packing machine. The cooling
process is carried out by a cooling conveyor, where it is also possible to check and adjust ill
formed candies. The process does not have any waste and is environmentally friendly.

2. Environmental Impact Assessment

The plant does not have any pollutant emitted from the production process. Thus, the project is
environment friendly.

B. ENGINEERING

1. Machinery and Equipment

The total cost of machinery and equipment is estimated at Birr 12,492,000 of which Birr
9,993,600 is required in foreign currency. The plant machinery and equipment required for the
envisaged project and the estimated costs are given in Table 5.1.
 7-13

Table 5.1
PLANT MACHINERY AND EQUIPMENT AND ESTIMATED COST

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

No. Measure F.C. L.C. Total
Qty.
1 Automatic dissolving Set 1 599.62 149.90 749.52
machine
2 Automatic vacuum “ 1 699.55 174.89 874.44
concentrator with receiving
tank
3 Powder mixing machine “ 1 599.62 149.90 749.52
4 Sugar grinder “ 1 599.62 149.90 749.52
5 Cooling table “ 2 899.42 224.86 1,124.28
6 Kneading machine “ 1 599.62 149.90 749.52
7 Hot table (working table) “ 2 999.36 249.84 1,249.20
8 Batch roller with sizing “ 1 599.62 149.90 749.52
roller
9 Plastic forming machine “ 1 599.62 149.90 749.52
10 Sifter “ 1 499.68 124.92 624.60
11 Three tray cooling conveyor “ 1 599.62 149.90 749.52
12 Packing machine “ 3 2,098.66 524.66 2,623.32
13 Boiler “ 1 599.62 149.90 749.52
Grand Total 9,993.60 2,498.40 12,492.00

2. Land, Buildings and Civil Works

The total area of land required for the envisaged project, including provision for open space is
1,800 m2, out of which 1,200 m2 will be built – up area. The construction cost of buildings and
civil works at a rate of Birr 4,500 per square meter is estimated at Birr 5.4 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
 7-14

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 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 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.

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
 7-15

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 m2 .This zone includes places that are surrounding the
city and are occupied by mainly residential units and industries.

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
3rd 1323
District
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 m2 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
 7-16

extending the lease payment period. The criterions are creation of job opportunity, foreign
exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.

Table 5.3
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion
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 land lease period for industry
is 60 years.

Accordingly, the total land lease cost at a rate of Birr 266 per m2 is estimated at Birr 478,800 of
which 10% or Birr 47,880 will be paid in advance. The remaining Birr 430,920 will be paid in
equal installments with in 28 years i.e. Birr 15,390 annually.

VI. HUMAN RESOURCE AND TRAINING REQUIREMENT

A. HUMAN RESOURCE REQUIREMENT

The total human resource required for the envisaged plant 37 persons. Annual labor cost is
estimated at Birr 388,080. Details of the human resource required and the estimated annual
labor cost including fringe benefits is given in Table 6.1.
 7-17

Table 6.1

HUMAN RESOURCE REQUIREMENT AND ESTIMATED LABOR 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 Salesman 2 1,600 19,200
7 Purchaser 1 800 9,600
8 Store keeper 2 1,600 19,200
Production supervisor/ 1
9 food biologist 2,000 24,000
10 Operator 6 3,000 36,000
11 Laborer 12 4,800 57,600
12 General mechanic 2 1,700 20,400
13 Electrician 2 1,700 20,400
14 Driver 1 750 9,000
15 Guard 3 1,200 14,400
Sub - total 37 26,950 323,400
Employees benefit, 20% of basic salary 5,390 64,680
Total 388,080

B. TRAINING REQUIREMENT

The production supervisor, 6 operators, quality controller, 3 mechanics, and 3 electricians

should be given three weeks on – the - job training on the operation, maintenance and
quality control by an advanced technician of the equipment supplier during erection and
commissioning. The total cost of training is estimated at Birr 145,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the chewing gum, chocolate, hard candy project is based on the data
presented in the previous chapters and the following assumptions:-
 7-18

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Raw material imported 120 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 24.63
million (See Table 7.1). From the total investment cost the highest share (Birr 20.27 million or
82.30%) is accounted fixed investment cost followed by pre operation cost (Birr 2.56 million or
10.42%) and initial working capital (Birr 1.79 million or 7.28%). From the total investment
cost Birr 9.99 million or 40.57% is required in foreign currency.
 7-19

Table 7.1

INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Local Foreign Total %

No. Cost Items Cost Cost Cost Share
No1 Fixed investment
1.1 Land Lease
430.92 430.92 1.75
1.2 Building and civil work
5,400.00 5,400.00 21.92
1.3 Machinery and equipment
2,498.40 9,993.60 12,492.00 50.71
1.4 Vehicles
1,500.00 1,500.00 6.09
1.5 Office furniture and equipment
450.00 450.00 1.83
Sub total
10,279.32 9,993.60 20,272.92 82.30
2 Pre operating cost *
2.1 Pre operating cost
956.25 790.00 3.21
2.2 Interest during construction
1,611.50 1,611.50 6.54
Sub total
2,567.75 2,567.75 10.42
3 Working capital **
1,792.26 1,792.26 7.28
Grand Total
14,639.33 9,993.60 24,632.93 100.00

* 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 2.22 million. However,
only the initial working capital of Birr 1.79 million 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 14.99 million (see
Table 7.2). The cost of raw material account for 38.11% of the production cost. The other
major components of the production cost depreciation, utility and financial cost which account
 7-20

for 21.68%, 13.09% and 10.35%, respectively. The remaining 16.76% is the share of labor,
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
(in 000 Birr) %
Raw Material and Inputs
5,713.55 38.11
Utilities
1,962.92 13.09
Maintenance and repair
624.60 4.17
Labor direct
323.40 2.16
Labor overheads
64.68 0.43
Administration Costs
500.00 3.34
Land lease cost
- -
Cost of marketing and distribution
1,000.00 6.67
Total Operating Costs
10,189.15 67.97
Depreciation
3,250.65 21.68
Cost of Finance
1,551.07 10.35
Total Production Cost
14,990.87 100.00

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 ranges from Birr 3.99 million to Birr 6.32 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 50.50 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.
 7-21

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 8,026,908
Variable Margin ratio (%)

Break -Even Capacity utilization = Break -even Sales Value X 100 = 41%
Sales revenue
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 4 years.
 7-22

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 31.74% 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 positive.

Accordingly, the net present value of the project at 10% discount rate is found to be Birr 26.02
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 37 persons. The project will generate Birr 15.78 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
linkage with sugar producers and also generates income for the Government in terms of payroll
tax.
 7-23

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 7-24

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 1,142.71 1,285.55 1,428.39 1,428.39 1,428.39 1,428.39 1,428.39 1,428.39 1,428.39 1,428.39

Accounts receivable 695.94 772.52 849.10 849.10 850.38 850.38 850.38 850.38 850.38 850.38

Cash-in-hand 16.81 18.91 21.01 21.01 21.22 21.22 21.22 21.22 21.22 21.22

CURRENT ASSETS 1,855.46 2,076.98 2,298.49 2,298.49 2,299.99 2,299.99 2,299.99 2,299.99 2,299.99 2,299.99

Accounts payable 63.20 71.10 79.00 79.00 79.00 79.00 79.00 79.00 79.00 79.00

CURRENT
LIABILITIES 63.20 71.10 79.00 79.00 79.00 79.00 79.00 79.00 79.00 79.00
TOTAL WORKING
CAPITAL 1,792.26 2,005.88 2,219.49 2,219.49 2,220.99 2,220.99 2,220.99 2,220.99 2,220.99 2,220.99
 7-25

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

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

Raw Material and Inputs 4,571 5,142 5,714 5,714 5,714 5,714 5,714 5,714 5,714 5,714

Utilities 1,570 1,767 1,963 1,963 1,963 1,963 1,963 1,963 1,963 1,963

Maintenance and repair 500 562 625 625 625 625 625 625 625 625

Labour direct 259 291 323 323 323 323 323 323 323 323

Labour overheads 52 58 65 65 65 65 65 65 65 65

Administration Costs 400 450 500 500 500 500 500 500 500 500

Land lease cost 0 0 0 0 15 15 15 15 15 15

Cost of marketing
and distribution 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Total Operating Costs 8,351 9,270 10,189 10,189 10,205 10,205 10,205 10,205 10,205 10,205

Depreciation 3,251 3,251 3,251 3,251 3,251 261 261 261 261 261

Cost of Finance 0 1,773 1,551 1,329 1,108 886 665 443 222 0

Total Production Cost 11,602 14,294 14,991 14,769 14,563 11,352 11,130 10,909 10,687 10,466
 7-26

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

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

Sales revenue 15,600 17,550 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500
Less variable costs 7,351 8,270 9,189 9,189 9,189 9,189 9,189 9,189 9,189 9,189

VARIABLE MARGIN 8,249 9,280 10,311 10,311 10,311 10,311 10,311 10,311 10,311 10,311
in % of sales revenue 52.88 52.88 52.88 52.88 52.88 52.88 52.88 52.88 52.88 52.88
Less fixed costs 4,251 4,251 4,251 4,251 4,266 1,276 1,276 1,276 1,276 1,276

OPERATIONAL MARGIN 3,998 5,029 6,060 6,060 6,045 9,034 9,034 9,034 9,034 9,034
in % of sales revenue 25.63 28.66 31.08 31.08 31.00 46.33 46.33 46.33 46.33 46.33
Financial costs 1,773 1,551 1,329 1,108 886 665 443 222 0
GROSS PROFIT 3,998 3,256 4,509 4,731 4,937 8,148 8,370 8,591 8,813 9,034
in % of sales revenue 25.63 18.56 23.12 24.26 25.32 41.79 42.92 44.06 45.19 46.33
Income (corporate) tax 0 0 0 1,419 1,481 2,444 2,511 2,577 2,644 2,710
NET PROFIT 3,998 3,256 4,509 3,311 3,456 5,704 5,859 6,014 6,169 6,324
in % of sales revenue 25.63 18.56 23.12 16.98 17.72 29.25 30.05 30.84 31.64 32.43
 7-27

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

Year Year Year Year Year Year Year Year Year Year Year
Item 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH
INFLOW 21,229 19,067 17,558 19,508 19,500 19,500 19,500 19,500 19,500 19,500 19,500 7,503
Inflow funds 21,229 3,467 8 8 0 0 0 0 0 0 0 0
Inflow operation 0 15,600 17,550 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 0
Other income 0 0 0 0 0 0 0 0 0 0 0 7,503
TOTAL CASH
OUTFLOW 21,229 11,818 13,480 14,178 15,154 15,011 15,751 15,596 15,441 15,286 12,915 0
Increase in fixed assets 21,229 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 1,855 222 222 0 1 0 0 0 0 0 0
Operating costs 0 7,351 8,270 9,189 9,189 9,205 9,205 9,205 9,205 9,205 9,205 0
Marketing and
Distribution cost 0 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 0
Income tax 0 0 0 0 1,419 1,481 2,444 2,511 2,577 2,644 2,710 0
Financial costs 0 1,612 1,773 1,551 1,329 1,108 886 665 443 222 0 0
Loan repayment 0 0 2,216 2,216 2,216 2,216 2,216 2,216 2,216 2,216 0 0
SURPLUS (DEFICIT) 0 7,249 4,078 5,330 4,346 4,489 3,749 3,904 4,059 4,214 6,585 7,503
CUMULATIVE CASH
BALANCE 0 7,249 11,326 16,657 21,003 25,492 29,241 33,145 37,204 41,418 48,004 55,507
 7-28

Appendix 7.A.5
DISCOUNTED CASH FLOW ( in 000 Birr)

Year Year Year Year Year Year Year Year Year Year
Item Year 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH INFLOW 0 15,600 17,550 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 7,503

Inflow operation 0 15,600 17,550 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 0

Other income 0 0 0 0 0 0 0 0 0 0 0 7,503

TOTAL CASH OUTFLOW 23,021 8,565 9,484 10,189 11,610 11,686 12,649 12,715 12,782 12,848 12,915 0

Increase in fixed assets 21,229 0 0 0 0 0 0 0 0 0 0 0

Increase in net working capital 1,792 214 214 0 1 0 0 0 0 0 0 0

Operating costs 0 7,351 8,270 9,189 9,189 9,205 9,205 9,205 9,205 9,205 9,205 0

Marketing and Distribution cost 0 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 0

Income (corporate) tax 0 0 0 1,419 1,481 2,444 2,511 2,577 2,644 2,710 0

NET CASH FLOW -23,021 7,035 8,066 9,311 7,890 7,814 6,851 6,785 6,718 6,652 6,585 7,503
CUMULATIVE NET CASH
FLOW -23,021 -15,986 -7,920 1,391 9,281 17,095 23,946 30,731 37,449 44,100 50,686 58,189

Net present value -23,021 6,396 6,666 6,995 5,389 4,852 3,867 3,482 3,134 2,821 2,539 2,893

Cumulative net present value -23,021 -16,626 -9,960 -2,964 2,425 7,277 11,144 14,626 17,760 20,581 23,119 26,012

NET PRESENT VALUE 26,012

INTERNAL RATE OF RETURN 31.74%
NORMAL PAYBACK 4 years