7.

PROFILE ON OAT FLAKES

 7-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 7-3

II. PRODUCT DESCRIPTION & APPLICATION 7-3

III. MARKET STUDY AND PLANT CAPACITY 7-4

A. MARKET STUDY 7-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 7-6

IV. MATERIALS AND INPUTS 7-7

A. RAW & AUXILIARY MATERIALS 7-7
B. UTILITIES 7-8

V. TECHNOLOGY & ENGINEERING 7-8

A. TECHNOLOGY 7-8
B. ENGINEERING 7-9

VI. MANPOWER & TRAINING REQUIREMENT 7-13

A. MANPOWER REQUIREMENT 7-13
B. TRAINING REQUIREMENT 7-14

VII. FINANCIAL ANLYSIS 7-14

A. TOTAL INITIAL INVESTMENT COST 7-15
B. PRODUCTION COST 7-15
C. FINANCIAL EVALUATION 7-16
D. ECONOMIC BENEFITS 7-18
 7-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of oat flakes
with a capacity of 65 tonnes per annum. The plant will also produce 16 tonnes of oat
husk per annum that can be used for animal feed as by product.

The present demand for the proposed product is estimated at 84 tonnes per annum. The
demand is expected to reach at 140 tonnes by the year 2020.

The major raw materials required are oat, salt, sugar and packing materials which are
available locally.

The total investment requirement is estimated at about Birr 7.44 million, out of which
Birr 3.4 million is required for plant and machinery. The plant will create employment
opportunities for 42 persons.

The project is financially viable with an internal rate of return (IRR) of 15.26 % and a
net present value (NPV) of Birr 2.40 million, discounted at 8.5%.

The establishment of the plant saves foreign exchange through import substitution. The
project will also creates backward linkage with the agricultural sector.

II. PRODUCT DESCRIPTION AND APPLICATION

Oat flakes are breakfast meals eaten with milk and generally favored by the modern
society. Oats are high in protein and are particularly good source of thiamine, or vitamin
B1. Oat flakes are produced from oat flour in a processing plant.
 7-4

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The Country's requirement for oat flake has been entirely met through imports. Table 3.1
shows the amount of imports of oat flake during 1997-2006. As can be seen from the
information depicted in the Table, imports of the product exhibited a substantial growth.
Imports of the product which was only 3.6 tonnes in year 2000 has increased to 100.2
tonnes in year 2006. During the period 2002 – 2006, import has registered an average
annual growth rate of 77%.

Table 3.1
IMPORTS OF OAT FLAKE (TONNES)

Year Imports
2000 3.6
2001 -
2002 15.6
2003 41.5
2004 28.9
2005 55.7
2006 100.2

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

Assuming supply was driven by demand, the average annual supply of oat flake for the
period 2005 – 2006 is considered as the effective demand for the product for the year
2006. Even though import of the product has registered a higher growth rate in order to
 7-5

be conservative the demand for the product is assumed to grow by 4% which corresponds
to the annual growth rate of the urban population.

Accordingly, taking the average import of 2005 – 2006 as a base and applying 4% growth
rate the present ( 2008) demand for oat flake is estimated at 84 tonnes.

2. Projected Demand

The consumption of oats flour and flake is mainly associated with the urban population.
Hence, a 4% rate of growth, which corresponds to the rate of urbanization in the Country,
is applied in projecting the demand for the product. Table 3.3 depicts the projected
demand for the products.

Table 3.2
PROJECTED DEMAND FOR OAT FLAKES (TONNES)

Projected
Year Demand
2008 88
2009 91
2010 95
2011 99
2012 103
2013 107
2014 111
2015 115
2016 120
2017 125
2018 130
2019 135
2020 140
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3. Pricing and Distribution

Oat flakes are currently retailed at Birr 30 - 40 per kg, respectively. Accordingly, the
factory gate price for the envisaged plant is estimated at Birr 35 per kg. During the
production of oat flakes, oat husks will be produced as by product which can be used for
animal feed. Based on current price a factory get price of Birr 2 per Kg is adopted for the
oat husks.

The envisaged plant can distribute its products through the existing wholesale and retail
network, which includes department stores, merchandise shops and super markets.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

On the basis of the market study and the technology envisaged, the plant will have annual
production capacity of 65 tons of oat flakes. The plant will also produce 16 tonnes of oat
husk per annum that can be used for animal feed as by product

2. Production Programme

The plant will start operation at 70%, and will increase its operation to 85% and 100%
capacities in the second and third years, respectively. The production Programme is
shown in Table 3.3.

Table 3.3
PRODUCTION PROGRAMME

year 1 2 3-10
Production(oat flakes)[ton] 45.5 55.25 65
Oat husk(by product)[ton] 11.2 13.6 16
Capacity utilization (%) 70 85 100
 7-7

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

Annual requirements of raw and auxiliary materials at full capacity utilization are given
in Table 4.1 below. The total cost of the materials is estimated to be about Birr
1,461,400. Except for the additives which need to be imported, the other items are
available locally. For instance pp bags and card board boxes can be sourced from local
packaging manufacturers, sugar from the local sugar factories, iodized salt from Afdera
and oat grows in different regions like Amhara, Oromia and SNNPRS.

Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENTS & COST

Sr. Description Unit of Qty. Cost(Birr)

No. measure
LC FC Total Cost
(Birr)

1 Oat Ton 80 758,400 - 758,400

2 Sugar `` 3.8 30,000 - 30,000
3 Iodized Salt `` 3 6,000 - 6,000
4 Additives `` 1.3 600 3400 4,000
3 PP bags (500 Pc 130,000 351,000 - 351,000
gm)
4 Card board box `` 5,200 312,000 - 312,000
Total 1,458,000 3,400
1,461,400
 7-8

B. UTILITIES

The utilities requirements of the plant are electricity, water and fuel oil. The total cost of
utilities is estimated to be Birr 320,970. The details are given is Table 4.2 below.

Table 4.2
ANNUAL UTILITIES REQUIREMENTS & COST

S/No Description Qty Unit rate Cost (Birr)

1 Electricity (Kwh) 20,000 0.4736 9,472
2 Water (m3) 6,000 3.25 19,500
3 Furnace oil (liter) 50,000 5.84 292,00
Total - 320,970

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The production of oat flakes – flaking – starts with groats. Groats are the resultant
products that have undergone the processes of cleaning and drying of the cereals and then
hulling which separates the hulls from the groats. The groats of this stage further
undergo the following processes.

• Groat Processing - This involves polishing, sizing and cutting

• Steaming – The processed groats pass through steamer which would
increase the moisture content of the groats from 8 – 10% up to 10 – 12%.
Flavoring ingredients such as sugar, salt are added at this stage.
 7-9

• Flaking – The resultant products pass through rollers to obtain the required
thicknesses. The flakes are then cooled in the open or through cooling
devices.
• Baking - The flakes are then baked in rotary oven.
• Packing - The baked flakes are then conveyed to the storage tank for
packing
The project does not have any adverse impact on environment since the plant will have a
dedusting unit to avoid emission of flour dust. The by product (oat husk) is saleable for
animal fattening establishments.

2. Source of Technology

The address of oat flakes machinery supplier is given below.

Jinan Darin Machinery Co. Ltd
19 Zhijinshi Street, Jinan, Shandong, CHAINA
ZIP/Postal Code: 250033
Fax 86 – 531 – 85066535

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required by the plant is given in Table 5.1 below,
and the total cost is estimated at Birr 3.4 million.
 7-10

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Qty. (No) Local Foreign Total

No. Description Cost Cost Cost
( in Birr)
1 Seed receiving and
cleaning unit Set 33,900 135,600 169,500
2 Seed huller 1
40,800 163,200 204,000
3 Milling unit Set
54,400 217,600 272,000
4 Boiler Set
68,000 272,000 340,000
5 Rotary steam cooker 1
81,600 326,400 408,000
6 Cooler (pan type) 1
47,940 191,760 239,700
7 Drier 1
47,600 190,400 238,000
8 Flaking machine 1
83,140 332,560 415,700
9 Rotary Oven 1
80,400 321,600 402,000
10 Screening and cooling 1
equipment 47,600 190,400 238,000
11 Packing machine 1
68,100 272,400 340,500
12 Other miscellaneous
equipments like elevators, 27,200 108,800 136,000
conveyors, pumps and
motor etc.
Total
680,680 2,722,720 3,403,400

2. Land, Building and Civil Works

The total land requirement for the plant is estimated to be about 900m2 of which about
420 m2 will be built up area, comprising of: production hall of 240m2, store of 100m2, and
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office block of 80m2. The total cost of building (at Birr 2500/ m2) will be about Birr 1.1
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.

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.
 7-12

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the City’s Investment Authority.
However, if the land request is above 5,000 m 2 the request is evaluated by the City’s
Investment 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 the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion
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.
 7-13

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 18.68 million of which 10% or Birr 1,868,400 will be paid in advance.
The remaining Birr 16.82 million will be paid in equal installments with in 28 years i.e.
Birr 600,557 annually.

V. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower requirement of the plant is shown in Table 6.1 below.

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOUR COST

Sr. Position No. of

No. Persons Salary’ Birr
Monthly Annual
1 Plant Manager 1 4,000 48,000
2 Secretary 1 800 9,600
3 Production Supervisor 1 1,500 18,000
4 Operator 6 3,600 43,200
5 Labourer 9 3,150 37,800
6 Cleaning Worker 3 1,050 12,600
7 Personnel 1 900 10,800
8 Accountant 1 1,000 12,000
9 Accounting Clerk 1 600 7,200
10 Cashier 1 700 8,400
11 Sales Man 2 1,200 14,400
12 Store Keeper 2 1,400 16,800
13 Purchaser 1 600 7,200
14 Mechanic 3 2,400 28,800
15 Electrician 3 2,400 28,800
16 Driver 2 1,000 12,000
17 Guard 4 1,400 16,800
18 Total 42 27,700 332,400
Employees’ Benefit, 20% of basic 5,540 66,480
Grand Total 33,240 398,880
 7-14

B. TRAINING REQUIREMENT

The production supervisor, operators and maintenance crew would be given training for
about two weeks during commissioning by the machinery supplier`s expert. The total
cost of training is estimated to be about Birr 70,000, 35% of which would be in foreign
currency.

VII. FINANCIAL ANALYSIS

The financial analysis of the oat flaks 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 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost
 7-15

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
7.44 million, of which 37 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value -
1,868.4 1,868.4
2 Building and Civil Work -
1,100.0 1,100.0
3 Plant Machinery and Equipment
680.7 2,722.7 3,403.4
4 Office Furniture and Equipment -
125.0 125.0
5 Vehicle -
200.0 200.0
6 Pre-production Expenditure*
536.5 49.0 585.5
7 Working Capital -
160.0 160.0
Total Investment cost
4,670.7 2,771.7 7,442.4

* N.B Pre-production expenditure includes interest during construction ( Birr 415.53

thousand), training ( Birr 70 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 3.16
million (see Table 7.2). The raw material cost accounts for 46.18 per cent of the
production cost. The other major components of the production cost are depreciation,
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financial cost and cost of utility which account for 15.23% 10.48% and 10.14%
respectively. The remaining 17.98% is the share of repair and maintenance, direct labour
and other administration cost.

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

Items Cost %
Raw Material and Inputs
1,461.40 46.18
Utilities 320.97 10.14
Maintenance and repair
170.17 5.38
Labour direct 199.44 6.30
Labour overheads
66.48 2.10
Administration Costs 132.96 4.20
Land lease cost
- -
Total Operating Costs 2,351.42 74.30
Depreciation 481.84 15.23
Cost of Finance 331.51 10.48
Total Production Cost
3,164.77 100

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 280,150 to Birr
490,130 during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 7.08 million.
 7-17

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 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 = 28 %
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 5 years.
 7-18

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 15.26 %
indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 2.40 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 42 persons. In addition to supply of the domestic
needs, the project will generate Birr 1.43 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. It has also a back ward linkage effect with the industrial
sector.