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Preliminary Feasibility Study

on the Business of Dairy Products Industry

Prepared by
Economic Performance Sector
Central Department of Feasibility Studies
General Department of Economic Feasibility Studies

March 2021

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(I) Project Basic Information:

Project Name A factory for producing dairy products
Project Surface Area and Land surface area 1000 m2
Location Qalyubia (Investment Zone in Banha)
Act of Disposition Usufruct
Price of Square Meter/ Year EGP 475/ m2 Qalyubia (Investment Zone in Banha)
Project Economic Life Five years
Expectancy
Project Products: Producing dairy products, such as: (milk – Domyati white cheese – plain
yoghurt – cream – cottage cheese – butter – powder milk – other dairy
products).
Expected Labor 20 workers and employees
Expected Investment Costs EGP 55,000,000 (approximately $ 3.5 million at exchange rate of
EGP15.6 / USD
Average Annual profits EGP 13 million
ROI 24%
Payback Period four years and one month
Feasibility Study Date March 2021

(II) Project Marketing Feasibility Study

1- About the Business

 Dairy products industry means the industrial activity that mainly processes milk products and
made into a variety of products, such as (pasteurized milk, all kinds of cheese, ghee, yoghurt
and ice cream).
 The business of dairy products is characterized as an important source of high levels of protein
and calcium, which increasing the demand of consumers over buying such products due to their
health benefits.
 Egypt is one of the main producers of dairy products in Africa and Middle East. GDP of milk
products in Egypt reached 7 million tons. Milk centers contribute in collecting 3 million tons.
 20% of raw milk produced in the farm is consumed, the remaining 80% is distributed as follows:
70 % of which is manufactured through producers within the scope of micro, small and medium
enterprises for providing homemade milk, cheese and butter. Only 10% of which is
manufactured through the modern commercial production sector on large scale. Cheese
production is the greatest activity within the dairy production process in Egypt.
 Dairy products industry represents 7% of total food industries, and 9% of net added value of
food industries.
 Dairy products industry contributes to 14% of total food industry exports in 2019, so it ranks
second in the exported products in food industries after fruits and vegetables.
 Governorates of lower Egypt is the main source of milk products, as they produce 58% of total
milk products production.
 Establishments working in dairy products industry varies in size between small and medium, in
addition to big factories and factories that work unofficially.

2- General Market Indices (SWOT Analysis)

a) Opportunities:

 The availability of places to establish factories.

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 The expected economic growth.

 The increasing improvement in business environment, such as tax incentives granted for exporters
and investors, and the improvement of customs regulations.
 The increasing demand over dairy products.
 The State tends towards establishing new milk collection centers in small livestock breeders and
dairy producers’ areas. In Gharbia, General Cooperative for Developing Animal Wealth &
Productive issued 425 licenses-to-operate livestock farms, which provides milk for milk factories.
 The increase in foreign marketing through conducting new agreements to be entered into force in
regional and global markets.

b) Threats:

 There are no marketing efforts for traditional cheese, such as Domyati and cottage cheese.
 The main product (milk) is a perishable product and highly sensitive to refrigeration and hygiene.
The appropriate transport of milk requires a connected cooling chain for preserving its quality. Cold
storing utilities may be not accessible and a large portion of milk may be lost.
 Innovation within the sector is decreasing, resulting in a decrease in the product development.
 Lack of methods and machinery of testing milk quality, which affects the quality of dairy products,
and consequently affects the competitive capability of institutions and of the industry as a whole.
 The role of intermediaries whom hamper the supply chain, have a monopoly approach and exploit
farmers by paying low prices, executing binding sale agreements and not passing on gains when
prices are seasonally high in response to reduced supply.
 Dairy products industry is characterized by the increase of the unofficial sector size that represents
79% of milk market in Egypt, which leaves a high chance of non-exploited processing. Furthermore,
retail food supply chain is fragmented among a large number of distributors, wholesalers and
retailers. Such kind of retail results in weakness in economies of scale, leading to manufacturing
products with quality and packaging lower than the standard.

3- Strengths:

 The demand over the different products of milk and cheese industry in the local market and
exportation.
 Dairy and cheese products are greatly consumed by families.
 Dairy industry contributes to creating job opportunities and increasing incomes in rural areas as
the majority of milk production comes from rural areas.

4- Weaknesses:

 The increase of production costs because of importing large amount of production supplies.
 The factor of seasons as milk production seasons are Winter and Spring, 70% of the annual dairy
production is produced during this period.
 The lack in means of supply and preparation (logistics), such as cold storing chains, cooling
transportation systems associated with lack of knowledge about the healthy handling of raw milk
from the farm to the factory, leading to a damage in the milk quality.
 The majority of production is directed to local market, and lack of interest in exportation to the
global market.
 Weakness of the local market and the undeveloped distribution channels, such as supermarkets and
hypermarkets.
 The majority of companies operating in this sector is classified as micro, small and medium
enterprises. These enterprises are unorganized, therefore, they do not take advantage of large
quantities of production and marketing the exports.
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5- SOWT Analysis Results:

 It is clear from the previous analysis that we the strengths can be used while dealing with external
threats. In addition, there are great opportunities in the market, and weaknesses can be overcome
through following modern scientific methods. There are great potentials in dairy sector in Egypt,
especially with regard to dairy manufacturing. The relation between dairy farms and factories should
be regularized for reaching a just price for milk supply, along with setting a new form for developing
milk collection centers because of their important role in increasing getting benefits from dairy
products, reflecting in reducing costs related to importing powdered milk.
 The importance of developing and implementing marketing and promotional campaigns to maintain
the Egyptian share in the Arab market, to promote the Egyptian cheese abroad (in new markets,
such as Europe and North America) and to increase its competitive capacity. In addition, research
and developing institutions are relied upon, along with strengthening the link between industry and
laboratories, as well as focusing on monitoring the quality and food safety systems.
 Establishments’ size operating in dairy products industry vary between small and medium, in
addition to big factories and factories operating unofficially.

3- The Results of the Marketing Feasibility Study according to Growth Drivers and Competitive
Strength:

a) Demand Volume:

 Local market growth of milk reaches 23 kg as an annual per capita consumption in Egypt. This ratio
is increasing continuously according to the population growth.
 Total liquid milk production is estimated at 5 million tons in 2017, which is 23 kg per capita
annually, and Egyptians consume more than 60 tons of cheese annually, according to the Swedish
Company Tetra Park statistics.
 There is an increase in the sales of famous dairy companies as a result of introducing new products
to the market, such as milk, flavored milk and cheese, in addition to a number of cooking creams,
flavored creams, plain yoghurt, and fruits yoghurt (whether full cream, half cream or skimmed).
Whipping cream used for cooking and desserts are the most famous products.
 Butter is imported mainly from New Zealand, which maintains its dominant position. As for Egypt’s
imports of cheese, they reached the peak in 2014 at 45000 tons.
 Egypt imports dairy products from many European countries, such as Netherlands, France, Poland,
and Germany. Egypt imports large quantities of unsweetened milk from Netherlands.

b) Supply Volume:

 The local market of cheese reached more than 60 tons annually, as the sub sector of cheese is
transferred in Egypt from loose (non-prepacked) cheese to prepacked cheese in the last decade to
reach 80% (according to Tetra Park Egypt; consequently, local companies sales increased at 15%.
 Local dairy industry is relatively fragmented, as it consists of 300 companies, the majority of which
are small companies, and more than 4000 dairy labs, 14 of these companies are members in Dairy
Development Committee, and 7-8 have important roles. Over the past few years, the market
develops from the dominance of local players to the local, regional and international players.
 Egypt exports of milk and dairy products are represented in cheese and curd, as it reaches 268,917$
(processed cheese and fresh cheese).
 Egypt exports of dairy products are mainly in cheese, representing 83% of total Egyptian exports
of dairy products in 2019, concentrated in processed and fresh cheese, which represent 80% of total
Egyptian cheese exports. Egypt is considered one of the largest countries exporting processed

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cheese in the World, however, it didn't succeed in having a product of its own, although the domyati
cheese has special characteristics.
 Egypt exports dairy products mainly to the Arab countries, as such countries represent 92% of total
dairy Egyptian exports in 2019. KSA, Libya and Jordan are at the fore at 19%, 16% and 14%
respectively. As for non-Arab countries, Russia, Turkey and Eritrea are at the fore that import dairy
products from Egypt at 1.2% to each.

c) Market Gap:

 Data extracted from the trade map and detailed in the diagram of the above trade balance indicate
that total Egypt’s exports of dairy products in 2018 reached 321$ million, and the total imports
reached 625$ million, resulting in a negative trade balance that reached 325$ million. Four dairy
groups out of six main groups achieved a negative trade balance, especially products codes (0402 –
0404 – 0405 – 0406).

d) Local Market:

 The main objective is covering the large demand on dairy products, which are imported from many
countries, in addition to satisfying growth expectations in demand through deepening local demand
and replacing the imports.
 This project satisfies local market needs, and will provide the paid amounts for importing huge
quantities of dairy products if manufacturing is done locally.

e) Potential Exportation Markets:

 One of the available opportunities of the project is to provide products with competitive price for a
number of countries that import large quantities, and they are as follow:
 Asian market imports = 18.5$ billion
 Gulf market imports = 5.7$ billion
 African market imports = 4.7$ billion
 Commonwealth of Independent States market imports = 2.9$ billion
 USA, Canada and Australia market imports = 6.7$ billion
 European market imports = 48$ billion

4- products, Expected Sale Volume and Prices during the Fiscal Year:

According to the industry mainstream, the attached prices are considered indicative prices in the light of
natural rates, and they may be adjusted as per the study date.

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They can be summarized during the annual production cycle as per the following table:

Product Measuring Expected Expected Average Selling Expected Total Annual Sales
Unit Sales Price Per Ton
Volume

Various Kinds Ton 2500 tons EGP 33,000/ ton EGP 82,500,000
of Dairy
Products

5- Expected Costs of Marketing Campaigns

Annual costs of marketing campaigns at the beginning of the project to achieve the spread are estimated at
EGP500,000 (Five hundred thousand Egyptian pounds).

(III) Project Legal Feasibility Study

 As per provisions of Investment Law, dairy industry is one of the activities subject to the
aforementioned law, and the State gives it due diligence and incentives. Thus, companies
incorporated for this purpose may be incorporated as per provisions of Investment Law, Companies
Law or Trade Law, according to the owners' desire.
 The project may be setup as sole proprietorship, partnership, limited liability company or joint stock
company.
 There are some legal determinants that should be considered in respect of obtaining the license-to-
operate from certain entities, namely: the relevant entity having the jurisdiction over the land, and
the local units affiliated thereto or the Government Office, licenses of Industrial Development
Authority, the necessary health licenses from Ministry of Health, and the requirements of Civil
Defense Authority.
 In the event of exportation, the project shall obtain the Import and Export Card, specifying the
nature and specification of the products dealt with, or exportation shall be made through an
intermediary company that undertakes the export and customs release procedures on behalf of the
project.
 In the event that the company carries out a different activity other than the main purpose thereof,
such activity should be added in the company’s commercial register, such as packing for others.
 Dairy companies should categorize their products according to the Egyptian standards of such
products. They are requested to clarify whether the product is produced from fresh milk, powdered
milk or both. The law requires labeling of processors and an indication of the percentage of
powdered milk in the mixture. This law applies on pasteurized milk, sterilized milk, ice cream,
cheese and yoghurt. For processing issues related to hygiene in the dairy sector, the Egyptian
Government issued a decree in 2001 regarding pasteurizing all dairies produced locally.
 Ministry of Trade and Industry plays an important role in regulating such industry. Ministry of
Agriculture also plays a vital role in supporting this industry, especially through the existing
research entities affiliated thereto in the public sector. A number of public research institutions have
been assigned to do researches for satisfying such needs and maximizing the economic return (such
as Agricultural Researches Center, Animal Production Researches Center, Food & Dairy
Technology Research Institute of the National Research Center). Ministry of Agriculture has

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announced that it is planning to increase the annual production of milk to reach 9.5 million tons in
2030, which is produced mainly by small farmers owning 80% of dairy production in Egypt.
 Incorporation fees, lawyer's charge and obtaining licenses are estimated approximately at EGP
100,000.

(IV) Project Social Feasibility Study:

 Social feasibility study aims at analyzing social benefits and costs of different projects to choose
the projects that get the most benefit. Social feasibility study is concerned with additional aspects
that other feasibility studies are not concerned with, as it focuses on the social impacts of the
project because of the project’s contribution to achieving the economic and social goals for the
society.
 The project helps in employing new job opportunities. Egypt is one of the top 20 countries
exporting cheese, and one of the main producers in the Middle East and Africa.
 The possibility of obtaining favorable employment results.
 The sector in general is labor intensive, and with the increase of supply, there are potentials of
labor growth. This sector employs large number of indirect labor, such as rural women who play
important role in livestock and works related to care, especially the milking processes and farm
dairy manufacturing.
 The sector has large number of micro, small and medium enterprises that operate unofficially. In
fact, barriers to Egyptian dairy market access are low as for small enterprises, as there are no
legislative barriers for the new entrants to the market. There are also high potentials for
development and growth in the value chain through the front and rear overlaps. Dairy industry is
very important for developing the rural areas, as 48% of families that have dairy animals depend
mainly on the income resulting from selling excess dairy products in their daily living expenses.
(V) Project Environmental Feasibility Study:
 The project is classified under list (a) in light of being setup within an industrial zone, and being
committed to evaluate the environmental impact of the project according to the environmental
classification form (a) and requirements of law of environment. The project should consider the
environmental requirements of such activity.
 The main environmental requirements are available in the investment zone, such as the availability
of sewage network, and the wastes are collected daily and delivered to the cleaning services
company or the one responsible for this task in a safe manner.
(VI) Project Technical Feasibility Study:
1- Machinery and Equipment Required for the Production Process:
Production Process

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Production process can be determined as follows:

Asset Useful Life Total Asset Cost Annual Net Book Value
Depreciation at the End of the
Period
 Milk receiving pump.
 Powder milk tank.
 Milk ripening pump.
 Homogenizer –
freezing room –
incubation.
 Pasteurized milk tank. 10 years 2,000,000 200,000 1,000,000
 Milk filter.
 Milk cooling tank.
 Double wall tank.
 Cheese cutting knives.
 Electrical panels and
connections.
Total 2,000,000 200,000 1,000,000

According to the previous table, expected total cost of machinery and equipment reach EGP 2 million, and
their annual depreciation value is EGP 200,000 with an economic life of 10 years, and their book value at
the end of the period estimated for the project (5 years) reaches EGP 1 million; taking into account that
values differ according to the country of origin of production lines and capacity.

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2- Phases of Production Process:

 Receiving milk: raw milk arrives at the reception platform in different containers, including
insulated tanks, metal churns and plastic barrels. After reception, milk is filtered and air removed,
and is measured according to size and weight. Milk is cooled to reach 4 degrees before storing in a
silo to be transferred to the manufacturing process. Milk may be pasteurized directly and stored in
processed barrels to be ready for the following process. In some products such as roumy cheese,
raw milk is processed in cheese tanks without pasteurization.
 Main processing: as for pasteurized dairy products, milk should be processed in steps, including
(filtration to remove foreign bodies – air removing: to expel gases and volatile matter, this is usually
made in a vacuum container connected to pasteurizer. - Cream separation: by a centrifugal separator.

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– Standardization: for standardization of fat and non-fat solids content through mixing cream with
skimmed milk. - Milk homogenization: homogenizer has a high pressure pump operating with a
powerful electric motor and a rear pressure device. – Pasteurization: for killing all pathogenic
microorganisms. – Heat processing).
 Fermented milk products: such as yoghurt and sour cream: the production of these products involves
inoculation of heat-treated milk and measured milk with bacterial starters by placing it in an
incubator for a specified period.
 Yoghurt: which is divided into two types: incubated and chilled yoghurt in packages, and whipped
or curdling yogurt, which is incubated in containers; however, the coagulation is broken down into
a liquid, sweetened, and flavored when necessary, then cooled before packing. Then the products
are filled into their final packaging. These machines are cleaned by cleaning in place at specified
intervals. Fermented products are packed either in syrup cartons or in plastic cups with aluminum
foil or paper lids.
 Production of butter and animal ghee: Butter: It is divided into sweet butter and fermented butter.
Butter can be produced either in the form of loose butter in churns or produced continuously in a
butter making machine.
 Cheese production: cheese production process involves a number of steps where the milk curd is
produced and then the milk loss is treated and the whey is separated. The treatment of milk curds in
the later stages of the industry varies according to the type of cheese to be manufactured, whether
semi-hard/hard cheese such as mozzarella, roumy, gouda and edam, or one of the soft cheeses such
as Quraish, Domiaty and feta cheeses.
 Salting: salt is added to cheese as a seasoning, but at the same time it acts as an inhibitor of initiating
and other bacterial activities. The percentage of salt in cheese is usually 5-17%, depending on the
type of cheese.
 Ripening: the process of cheese ripening induces a series of microbial, biochemical and physical
changes in the cheese. Ripening is carried out upon storage under controlled conditions and involves
several stages of ripening with specific combinations of heat and humidity. A complete air
conditioning system is required to maintain the ripening conditions.
 Ultrafiltration: It is a membrane technology used to concentrate large and huge particles, and it can
be used in cheese manufacturing to concentrate milk proteins and fats in order to measure the ratio
of protein to fat.
 Packing: spreadable processed cheese is usually packed in plastic tubs with an inner lid of aluminum
foil, and soft cheeses such as cottage cheese are packed in small plastic containers; while other types
such as Camembert cheese are wrapped in aluminum foil or paper, and aluminum foil is also used
in packaging blue cheese. Hard cheeses can be packed in cardboard boxes or cut into smaller blocks,
and packed in plastic bags. Before slicing the cheese, the curd is cut and collected from the
asymmetric pieces for further processing in the form of grated or cooked cheese. Many types of
cheese are subject to brushing or washing after ripening and before packing in retail packages.
 Whey treatment: cheese and cream flakes are separated, either by spiral separators, centrifugal
separators, or rotary filters, then reverse osmosis is used to pre-concentrate the whey, which is based
on a membrane technology that retains high- and low-molecular materials.
 Milk powder production: evaporation is used as a first step to reduce moisture content, followed by
drying; the reason is that drying process requires twenty times the amount of energy per kilogram
of evaporated water compared to the evaporation process. The need for energy efficiency today has
resulted in the use of multi-effect evaporators and dual-stage dryers.

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 The powder is usually packed in multi-layer paper bags with an inner bag of polyethylene, and it is
welded; the sizes of bags are usually 15 and 25 kg, and large bags are also used as cans and barrels.
The bags are stored on pallets and plastic covers for protection.
 Ice cream production: there are four categories of ice cream; either made from dairy products only,
made with vegetable oils, or frozen syrup made from fruit juice with the addition of milky-based
ingredients, or granita made from water, sugar and fruit concentrate.
 Ice cream manufacturing process involves dealing with both dry and liquid raw materials. They are
also stored in silos, tanks, containers and bags. The dairy products are cooled before storage. When
butter is used as an ingredient it is melted and stored in tanks, usually under inert gas protection.
The dry ingredients must be stored and treated in a dry area. Dry loose materials such as crystallized
sugar and milk powder can be stored in silos. The ingredients are weighed or measured by volume
in a mixing tank fitted with a mixer, the mixture is heated indirectly and mixed until it reaches a
cohesive mass.
 Ice cream mixture is preheated in a plate heat exchanger before it is homogenized, and then the
mixture is pasteurized and cooled. The mixture is then aged in the ageing tank for at least 4 hours.
 Then the ice cream mixture is pumped into a continuous freezer, consisting of a cylinder equipped
with a cooling system containing ammonia and a roller scraper. Then the ice cream is filled into
cups and cones or cans in a filling machine. The packages are passed through a hardening tunnel,
and the ice cream can be extruded on trays or into molds in flat tunnel extrusion units. The trays
pass through the hardening tunnel for final freezing. After hardening, they are removed from the
trays, wrapped and packed in cartons.
 Packing and storage: liquid dairy products are mainly packed in cartons for drinks of various sizes,
and yoghurt and related products are packed in plastic cups with aluminum foil lids or with plastic-
coated paper. Cardboard and paperboard are used as secondary packing materials. These packages
are wrapped together in plastic wrap and stored on wooden pallets.
 Other products, such as butter and cheese, are packed in aluminum foil or plastic wrap, or filled in
small plastic containers.
 For fresh dairy products packed in mugs, it is common to use cardboard trays or plastic trays as a
second packaging, and the trays are used for transportation as well as for displaying products in
stores. They prevent damage to the mugs and protect the content from external shocks. The plastic
trays are returned to the dairy, and then reused after washing.
 Metal tube cages are used to transport and display liquid products in beverage cartons, and the cages
are returned to dairies where they are washed before being reused.
 The equipment used for packing consists of filling machines, conveyors, mechanical tray formers,
packaging machines and plate machines. The packages are transported to warehouses using
saturated cranes and electric trucks.
 Regulation and sterilization: is an intrinsic part of operations in a dairy, and specific hygiene
standards and cleaning requirements are usually determined by the relevant authorities. The purpose
is to achieve chemical and bacterial hygiene, which means that the equipment is first thoroughly
cleaned with chemical detergents, followed by sterilization using disinfecting agents.
 Steam: steam is the most widely used heating system in the daily treatment process. The steam
originates in steam boilers, and is distributed to the treatment area through insulated tubes. The
condensate is returned to the condensing tank, and recycled as feeding water to boilers. The boilers
usually operate on oil, coal or gas fuels; and electricity is used also.
 Electricity: electricity is used to operate machinery and equipment, refrigeration, ventilation and
lighting, and to produce compressed air. Dairy factories usually purchase the necessary electricity
from local distributors. The electricity system in dairy factories consists of the following:
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- High voltage switchgear: high voltage switches

- Power transformers
- Low voltage switchgears
- Electricity generating set
- Engine control centers
 Compressed air: pneumatic automatic operating systems are frequently used in dairy factories.
Compressed air is also used in the operating device in some equipment such as filling machines and
valves to empty the product from the tubes and for the purpose of stirring. Compressed air is
produced in an air compressor and directed to dehumidifiers, where the water vapor is removed by
cooling and condensation. The air is then dried in sorption filters and sterilized in sterile filters.
 Cooling: A refrigerant is a closed device in which refrigerant agents circulate between gaseous and
liquid states through an exchange between pressure reduction and pressure increase. Ammonia is
one of the most widely used refrigerating agents, as the use of Freon is restricted due to its negative
effects on the ozone layer. Most dairy factories have ponds or silos for chilled water.
 Water supply: dairy processing requires large amounts of fresh water, and it is mainly used to clean
equipment. The incoming water must be treated to meet the relevant quality requirements for the
application.
3- location:
The project is carried out in Qalyubia Governorate in the ARE in the Investment Zone in Banha due to the
availability of utilities and the licenses necessary for food industry, in addition to the availability of efficient
labor and reasonable prices, as well as providing lands including buildings with reasonable prices.
The location is clarified on Qalyubia Governorate map:

The land surface area required for the project is 1,000 m2

According to the terms of reference announced for the reservation of units in the Investment Zone in
February 2021, the average usufruct per square meter for an industrial unit including buildings is EGP 475
annually. The unit has all the facilities required for the project, as well as granting it licenses for the food
industries required for the activity, with the application of an annual increase of 10%.
Accordingly, the total estimated cost of the land = 1000 m2 * EGP 475 = EGP 475000 approximately,
including service buildings (only four hundred seventy-five thousand Egyptian pounds) with an annual
increase of 10%.
4- Determining the Required Annual Running Costs:
a. Raw materials required to produce the expected sales volume:

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The project needs, to be able to produce and achieve the expected sales amount of 25,000 tons of quantities,
raw materials represented in (raw milk - rennet - fruit concentrates - yoghurt - salt - water), and their
expected average annual cost is estimated at = EGP 52,000,000 (fifty-two million Egyptian pounds).
b. Electricity, water and production requirements required to produce the expected sales volume:
- Electricity consumption = 36,000 kWh
- Water consumption = 600 cubic meters
- Other supplies (oils and greases - cleaning chemicals).
According to the average industry rates, the consumed part of the production requirements for the operation
of 2500 tons is estimated at about EGP 2,500,000 (only two million five hundred thousand Egyptian
pounds).
c. Employment:
The expected volume of employment for the project is estimated at 20 workers, and assuming the average
wage of the worker is EGP 5000, with a total monthly amount of EGP 100 thousand, and the estimated
annual cost of labor is estimated at EGP 1,200,000, and it can be divided into (administrative labor at a cost
of EGP 240,000 annually, and productive labor at a cost of EGP 960,000 annually).
d. Costs of packaging materials:
The project needs packing materials from cartons and containers according to the expected sales volume
with an estimated average of EGP 2,000,000 (only two million Egyptian pounds).
e. Other general and administrative expenses
Item Expected Annual Cost
Electricity and lighting expenses 250,000
Transportation allowance 250,000
Lawyer fees for reviewing various 100,000
contracts
Food and drinks for employees 500,000
Safety and security supplies 250,000
Hospitality and reception expenses 250,000
Chartered accountant 100,000
Invoices, publications and stationery 100,000
Miscellaneous expenses 200,000
Total 2,000,000
According to the previous table, the estimated annual costs for the general and administrative expenses are
estimated at EGP 2,000,000 (only two million Egyptian pounds).

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(VII) Project Financial Feasibility Study:

1- Foundations and Hypothesis of the Financial Study:
 In this financial feasibility study, data and sales revenue estimates are based on the market study
results.
 Investment cost values and other costs and expenses have been estimated based on the technical
study results.
 Machinery and equipment annual depreciation is estimated based on the technical study results.
Same machinery and equipment sale value is presumed to be matching their book value at the end
of the expected lifetime of the project.
 It is presumed that the first operating cycle requirements are obtained with a 25% facilities from
suppliers.
 It is taken into account that the estimated value of the fixed assets mentioned in this study is time-
and-circumstance limited; it is related to a specific period in specific circumstances. Accordingly,
such value may change by change of circumstances or by report time prescription or change of
economic climate.
 Pursuant to the Egyptian Accounting Standards, it is presumed that incorporation and pre-
commencement costs are fully expired by the first year of revenue.
 The economic life of the project is estimated to be five years.
 The estimated income statements have been prepared on the presumption that there is no
fundamental change in the revenue values and expected annual costs during the study period other
than the estimated growth rate in sales, which corresponds to a similar rate of growth in costs of
10% per annum.
 Pursuant to the Egyptian legislation prevailing at the time at which this study has been prepared,
a tax rate (TR) of 22.5% on companies' annual profits, and 20% of the returns on treasury bonds
issued by the Egyptian Ministry of Finance.
 Annual cash flows are estimated using the indirect estimation method; necessary adjustments have
been applied to the results of the estimated income statements of the years in this study.
 The criteria of Return on Investment (ROI), Payback Period (PBP), Net Present Value (NPV), and
Internal Rate of Return (IRR) have been applied to the assessment of the economic feasibility of
the project. The required rate of return (RRR) on investment has also been taken into account.
 RRR on investment has been determined using the weighted average cost of capital (WACC)
method, and it is presumed that the project is fully funded by the owners.
 Future financial estimates include estimated and intangible risks and other factors that may lead to
a difference between project expected performance – which is based in this study on the business
climate prevailing at the time of preparing it – and the actual performance and results achieved by
the project.

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2- RRR on Investment
 It is the minimum return required by an investor in order to invest in Egypt, provided that such
return be assessed in light of the industrial risks to be faced by the project being the subject-matter
of this study.
 It is concluded under this study that an RRR with a value of 18%, based on the risks of the study
under consideration in Egypt is to be used and calculated as follows:

RRR = [RFR + (CRP x β)]

 Based on the official data published by CBE regarding the Egyptian treasury bonds to be mature at
the end of 2026 – a period covering almost all project valuation period (five years) – the Risk Free
Rate (RFR) is calculated using the Weighted Average Yield of various bond issues during the said
period.
https://www.cbe.org.eg/en/Auctions/Pages/AuctionsEGPTBondsCouponHistorical.aspx

Pre-tax average Yield ‫متوسط العائد قبل خصم الضرائب‬

Average Yield after 20% Tax %20 ‫متوسط العائد بعد خصم ضريبة‬

 Country Risk Premium (CRP) of 5.33% is used based on Egypt's global ranking issued by
Moody's Cooperation and "Standard & Poor's" (S&P); and according to Egypt's 2021 market data
as updated on Damodaran’s website.
http://www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx
 Third, in respect of risks of the industry under consideration in the Egyptian market, the beta
coefficient is estimated to be 1.20 based on the average risks of such industry.
http://www.stern.nyu.edu/~adamodar/pc/datasets/ betas.xls
Accordingly, RRR on investment is calculated as follows:

RRR = (11.43 + 5.33 x 1.20) = ~ 18%

3- Estimation of Project Investment Cost:

 In accordance with Article (11) of the Executive Regulations of Investment Law No. 72 of 2017
issued by Prime Minister Decree No. 2310 of 2017, Project Investment Cost is defined as follows:
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"Project investment cost shall mean such costs required to set up an Investment Project. These
include property rights; long-term liabilities invested in setting up or establishing fixed corporeal
(tangible) assets or incorporeal (intangible) assets, conditional on payment of value thereof in cash;
and working capital."
The opening budget of the investment project can be prepared in accordance with the results of the
estimated technical feasibility study as follows:
Item Value (EGP)
LONG-TERM ASSETS
Incorporation, licensing and pre-commencement 100,000
expenditure
Lands 0
Buildings 0
Machinery and equipment 2,000,000
Total long-term assets 2,100,000
CURRENT ASSETS
Stock of materials and production requirements 60,000,000
Stock of packing materials 2,000,000
Cash and cash equivalents (1) 6,400,000
Total current assets 68,400,000
CURRENT LIABILITIES
Suppliers of raw materials and production requirements 15,000,000
Suppliers of packing and packaging materials 500,000
Total current liabilities 15,500,000
Working capital 52,900,000
Total investments 55,000,000
TO BE FUNDED AS FOLLOWS:
Equities
Capital 55,000,000
Investment Total Funding 55,000,000

1 The cash required to cover the expenses of the first operating cycle is EGP 6.4 million, divided up into the following:
(EGP 1.2 million for labour payroll, EGP 0.5 million for land and buildings usufruct cost, EGP 0.5 million for
marketing expenses, about EGP 2.2 million for energy, gas and electricity consumption, as well as general and
administrative expenses including food, allowances, stationery, professional fees…etc.).
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Investment Costs ‫رسم بياني لهيكل االنفاق‬

Graph ‫االستثماري‬
Incorporation, ‫مصروفات تأسيس‬
licensing and pre- ‫وتراخيص وما قبل النشاط‬
commencement
expenditure
Lands ‫االراضي‬
Buildings ‫المباني‬
Machinery and ‫اآلالت والمعدات‬
equipment
Working capital ‫رأس المال العامل‬

Hence, project total investment costs = total long-term assets + working capital = ~
EGP 55,000,000 (Only fifty-five million Egyptian pounds) or ~ USD 3.5 million
(Only three million and 5 hundred thousand United States Dollars, if the exchange
rate of USD 1 equals EGP 15.6.

4- Expected Income Statements for the Years of Investment Project

Such statements can be prepared according to the results of the technical feasibility study as follows:

Item ‫البيان‬
First Year ‫السنة األولى‬
Second Year ‫السنة الثانية‬
Third Year ‫السنة الثالثة‬
Fourth Year ‫السنة الرابعة‬
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Fifth Year ‫السنة الخامسة‬

Total revenue ‫إجمالي اإليرادات‬
Subtract: :‫يخصم‬
Cost of Sales ‫تكلفة المبيعات‬
Gross Profit ‫مجمل الربح‬
Subtract: :‫يخصم‬
Incorporation and pre-commencement ‫مصروفات لتأسيس وما قبل النشاط‬
expenditure
Depreciation of fixed assets ‫اهالك األصول الثابتة‬
General, administrative and marketing ‫مصروفات عمومية وإدارية وتسويقية‬
expenses
Net accounting profit before tax ‫صافي الربح المحاسبي قبل الضرائب‬
Subtract: :‫يخصم‬
Tax (at a rate of 22.5%) )%22,5( ‫الضريبة بمعدل‬
Net accounting profit after tax ‫صافي الربح المحاسبي بعد الضرائب‬
Return Rate on Capital ‫معدل العائد على رأس المال‬

Annual Profits Development Graph ‫رسم بياني لتطور األرباح السنوية‬

5- Estimating the cash flow stream for the years of the investment project:
According to the foregoing, the cash outflow in year zero = EGP 55,000,000.
The cash flow stream of the economic life of the project can be estimated indirectly through adjusting the
net accounting profit by re-adding the depreciation premium because it is a non-cash expense, and by re-
adding the incorporation and pre-commencement expenditure because they are calculated within the value
of the outgoing investment costs in the year zero.

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Item ‫البيان‬
First Year ‫السنة األولى‬
Second Year ‫السنة الثانية‬
Third Year ‫السنة الثالثة‬
Fourth Year ‫السنة الرابعة‬
Fifth Year ‫السنة الخامسة‬
Total revenue ‫إجمالي اإليرادات‬
Subtract: :‫يخصم‬
Cost of Sales ‫تكلفة المبيعات‬
Gross Profit ‫مجمل الربح‬
Subtract: :‫يخصم‬
Incorporation and pre-commencement ‫مصروفات لتأسيس وما قبل النشاط‬
expenditure
Depreciation of fixed assets ‫اهالك األصول الثابتة‬
General and administrative expenses ‫مصروفات عمومية وإدارية‬
Net accounting profit before tax ‫صافي الربح المحاسبي قبل الضرائب‬
Subtract: :‫يخصم‬
Tax (at a rate of 22.5%) )%22,5( ‫الضريبة بمعدل‬
Net accounting profit after tax ‫صافي الربح المحاسبي بعد الضرائب‬
Adding non-cash and operating expenses ‫تشغيلية‬/‫يضاف مصروفات غير نقدية‬
Depreciation and incorporation and pre- ‫اهالك ومصروفات التأسيس وما قبل النشاط‬
commencement expenditure

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Net operating cash flow ‫صافي تدفق نقدي تشغيلي‬

Adding other revenues for the last year ‫يضاف إيرادات أخرى للسنة األخيرة‬
Net working capital ‫صافي رأس المال العامل المسترد‬
Salvage Value of Fixed Assets ‫القيمة التخريدية لألصول الثابتة‬
Net annual cash flow ‫صافي التدفق النقدي السنوي‬

Annual Cash Flow Stream Graph ‫رسم بياني لتيار التدفق النقدي السنوي‬

Accordingly, the annual cash flow stream can be summarized as follows:

Years Zero 1 2 3 4 5
Net Annual Cash Flow 55,000,000 10,995,000 12,065,250 13,267,275 14,589,503 69,943,953

6- Financial Feasibility Indicators for the Investment Project:

I. ROI
II. PBP
III. NPV
IV. IRR
I. ROI:
According to what was previously explained and by reviewing the estimated income statements for the
project, the average ROI can be calculated as follows:
Ratio of average net accounting profit to investment cost =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
%
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡𝑠

Net Accounting Profit Expected ROI on

Year Paid-in Capital
After Tax Investment
1 10,695,000 19%
2 11,865,250 22%
3 13,067,275 55,000,000 24%
4 14,389,503 26%
5 15,843,953 29%
Simple Annual Average ROI 24%

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Project ROI Results:

In respect of the paid-in capital, the project has recorded an average percentage of net accounting profit of
24%, which exceeds the investors' RRR, which was previously determined at 18%, and this stresses that
the project is financially feasible.
It is worth noting that this indicator is an aid tool to evaluate the project. However, it cannot be relied upon
alone in determining the economic feasibility of the project, as this indicator is faulted for the following:

a) Its dependence on the net accounting profit, which may be based on depreciation and provisions
estimates that may lead to a return value that is different from the actual value achieved by the
project; and
b) Not expressing the actual cash flows, which may give misleading results.
II. PBP:

The payback period is the amount of time a project takes to recover its investment costs through the net
cash flows expected to be achieved during the operating years. Therefore, such period covers the years the
project took to reach the break-even point.

In accordance with the above mentioned, and by reviewing the estimated annual cash flow statements
for the project, the payback period can be calculated as follows:

Years Zero 1 2 3 4 5
Net Annual Cash
55,000,000 10,995,000 12,065,250 13,267,275 14,589,503 69,943,953
Flows
Net Cumulative
55,000,000 44,005,000 31,939,750 18,672,475 4,082,972 65,860,980
Annual Cash Flows
Payback Period by
4.06
Years
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 = 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑛𝑒𝑡 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤
𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑎𝑠𝑡 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤
+
𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑜𝑙𝑙𝑜𝑤𝑖𝑛𝑔 𝑦𝑒𝑎𝑟

absolute value of last negative cumulative cash flow

Number of Years of Negative
+
Cash Flows
cash inflow of the following year

4,082,972
4 +
69,943,953

4 + 0.06

PBP (months) = 4.06

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Project PBP Results:

The project has successfully recovered all of its investment costs within an approximated PBP of four years
and one month in operation, and this period does not exceed the projected economic life of the project,
which is five years. This stresses that the project is financially feasible and its potential risks are reduced.

It is worth noting that the project has recovered its investment costs within a short period, which presents
an opportunity for investors to reinvest the recovered capital in other projects or to make expansions in the
project, and maximize ROI.
However, this indicator is criticized for having overlooked the time value of money, which will be taken
into consideration later in NPV and IRR below.

III. NPV and IRR:

NPV is the difference between the present value of net cash inflows during the operating years and the
present value of net cash outflows throughout the establishment phase. On the other hand, IRR is the
discount rate at which project NVP is zero.

𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

Present value of cash inflows = Σ [ ]
( 1 + 𝑟)𝑖

By reviewing the estimated annual cash flow statements for the project, NPV can be calculated
using a discount rate of 18%, and it represents the return requested by investors as follows:

Years Zero 1 2 3 4 5
10,995,000 12,065,250 13,267,275 14,589,503 69,943,953
Net Annual Cash Flow 55,000,000
The Present Value Factor
for an amount at discount 1 0.847458 0.718184 0.608631 0.515789 0.437109
rate of 18% and (i) years
Present Value of Cash Flow 55,000,000 9,317,797 8,665,075 8,074,873 7,525,103 30,573,146

NPV of Cash Flow 9,155,994

IRR 23%
 PV of net cash inflows during the operating years = EGP 64,155,994
 PV of net cash outflows during the establishment phase = EGP 55,000,000.
 NPV = the present value of net cash inflows - the present value of net cash outflows.
 NPV = EGP 64,155,994 - EGP 55,000,000 = EGP 9,155,994.

Project NPV and IRR Results:

The project has recorded a positive NPV that is greater than zero, which means that the project has
recovered the entire capital and exceeded investors' RRR with a surplus stressing that this project is
financially feasible and able to endure potential risks and decline in profits within the scored surplus limits.

Moreover, the project achieved an IRR at a value of 23%, which exceeds the investors' RRR that is 18%.
This stresses that the project is financially feasible.

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IX Conclusions and Recommendations:

The project is economically feasible in light of the following reasons:

 The project achieves an average ROI = 24%

Where:
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
Ratio of average net accounting profit to investment cost = %
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡𝑠

Average ROI Percentage = 13,172,196 ÷ 55,000,000 = 24%

 Quick recovery of project costs: PBP = 4.06 years
Where:

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 = 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑛𝑒𝑡 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤

𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑎𝑠𝑡 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤
+
𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑜𝑙𝑙𝑜𝑤𝑖𝑛𝑔 𝑦𝑒𝑎𝑟

PBP Value = 4 + (4,082,972 ÷ 69,943,953) = four years and one month approximately

 The project achieves a positive NPV = EGP 9,155,994

Where:
𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
Present value of cash inflows = [ ]
( 1 + 𝑟)𝑖

NPV = Present Value of Cash Flows – Investment Costs = 64,155,994 – 55,000,000 = EGP 9,155,994

 The project achieves IRR = 23%, which exceeds the investors' RRR in accordance with industry rates.
 The required technical know-how to set up the project is available in Egypt, especially at Qalyubia
governorate, which is characterized by its proximity to mineral resources and all utilities necessary for
the project. In addition, chemical industries licences required for the project are granted and skilled
workforce is also available for hire in return for reasonable prices.
 There is an adequate logistic network of roads and ports. In addition, Egypt's strategic geographical
location gives the project a competitive edge i.e. it helps in reducing costs and penetrating the global
markets with competitive prices.

NB: The data mentioned in this technical feasibility study are only estimates that are based on the data
provided by Industrial Development Authority (IDA).

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