136.

PROFILE ON THE PRODUCTION OF

JUTE BAGS & TWINE ROPE
 136-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 136-2

II. PRODUCT DESCRIPTION & APPLICATION 136-2

III. MARKET STUDY AND PLANT CAPACITY 136-4

A. MARKET STUDY 136-4
B. PLANT CAPACITY & PRODUCTION PROGRAM 136-7

IV. MATERIALS AND INPUTS 136-7

A. RAW & AUXILIARY MATERIALS 136-7
B. UTILITIES 136-8

V. TECHNOLOGY & ENGINEERING 136-8

A. TECHNOLOGY 136-8
B. ENGINEERING 136-9

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 136-14

A. HUMAN RESOURCE REQUIREMENT 136-14
B. TRAINING REQUIREMENT 136-15

VII. FINANCIAL ANLYSIS 136-15

A. TOTAL INITIAL INVESTMENT COST 136-16
B. PRODUCTION COST 136-17
C. FINANCIAL EVALUATION 136-18
D. ECONOMIC AND SOCIAL BENEFITS 136-20
 136-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of jute bags & twine rope
with a capacity of 450 tons per annum. Jute bags & twine rope are used chiefly to make cloth for
wrapping bales of raw cotton, and to make sacks and coarse cloth. The fibers are also woven into
curtains, chair coverings, carpets, area rugs, hessian cloth, and backing for linoleum.

The demand for jute bags & twine rope is met through domestic production and import. The
present (2012) demand for jute bags & twine rope is estimated at 738 tons and 118 tons,
respectively. The demand for jute bags & twine rope is projected to reach 1,189 tons and 190
tons by the year 2017 and 2022, respectively.

The principal raw material required is jute fiber has to be imported.

The total investment cost of the project including working capital is estimated at Birr 16.95
million. From the total investment cost the highest share (Birr 12.85 million or 75.80%) is
accounted by fixed investment cost followed by initial working capital (Birr 2.18 million or
12.89%) and pre operation cost (Birr 1.92 million or 11.31%). From the total investment cost
Birr 5.01 million or 29.56% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 33.50% and a net present
value (NPV) of Birr 20.25 million discounted at 10%.

The project can create employment for 45 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 forward linkage with the textile sub sector and also generates income for the
Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Jute is a long, soft, shiny vegetable fiber that can be spun into coarse, strong threads. It is
produced from plants in the genus Corchorus, which has been classified in the family Tiliaceae,
or more recently in Malvaceae. However, it has been reclassified within the family
Sparrmanniaceae.
 136-iv

Jute is one of the most affordable natural fibers and is second only to cotton in amount produced
and variety of uses of vegetable fibers. Jute fibers are composed primarily of the plant
materials cellulose (major component of plant fiber) and lignin (major components of wood
fiber). It is thus a ligno-cellulosic fiber that is partially a textile fiber and partially wood. It falls
into the bast fiber category (fiber collected from bast or skin of the plant) along
with kenaf, industrial hemp, flax (linen), ramie, etc. The industrial term for jute fiber is raw jute.
The fibers are off-white to brown, and 1–4 metres (3–12 feet) long. Jute is the second most
important vegetable fibre after cotton. Jute is used chiefly to make cloth for wrapping bales of
raw cotton, and to make sacks and coarse cloth. The fibres are also woven into
curtains, chair coverings, carpets, area rugs, hessian cloth, and backing for linoleum.
While jute is being replaced by synthetic materials in many of these uses, some uses take
advantage of jute's biodegradable nature, where synthetics would be unsuitable.

Jute is used in the manufacture of a number of fabrics such as Hessian cloth, sacking, scrim,
carpet backing cloth (CBC), and canvas. Hessian, lighter than sacking, is used for bags,
wrappers, wall-coverings, upholstery, and home furnishings. Sacking, a fabric made of heavy
jute fibres, has its use in the name. CBC made of jute comes in two types. Primary CBC provides
a tufting surface, while secondary CBC is bonded onto the primary backing for an overlay. Jute
packaging is used as an eco-friendly substitute.

Diversified jute products are becoming more and more valuable to the consumer today. Among
these are espadrilles, soft sweaters and cardigans, floor coverings, home textiles, high
performance technical textiles, Geo-textiles, composites, and more.

Advantages of jute include good insulating and antistatic properties, as well as having low
thermal conductivity and moderate moisture regain. Other advantages of jute include acoustic
insulating properties and manufacture with no skin irritations.

Jute has the ability to be blended with other fibers, both synthetic and natural, and accepts
cellulosic dye classes such as natural, basic, vat, sulfur, reactive and pigment dyes. Jute can also
be blended with wool. By treating jute with caustic soda, crimp, softness, pliability, and
appearance is improved, aiding in its ability to be spun with wool. Liquid ammonia has a similar
 136-v

effect on jute, as well as the added characteristic of improving flam resistance when treated with
flam proofing agent.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The country's requirement of jute bags & twine rope is mainly met through domestic production.
However, due to shortage of the jute bags and twine ropes, the country has been importing
substantial amount of the products. According to CSA’s Statistical Abstract, there are three
establishments engaged in the manufacturing of jute bags & twine ropes in the country. The total
supply of jute bags and twine ropes i.e., from domestic production and import is presented in
Table 3.1.
Table 3.1
TOTAL SUPPLY OF JUTE BAGS & TWINE ROPES (TONE)
Jute Bags Rope
Year Domestic Total
Production1 Import2 Suppl Imports2
y
2000 5708 15.26 5,723 292.3
2001 5981 16.61 5,998 211.89
2002 5691 17.97 5,709 314.61
2003 3960 36.28 3,996 119.64
2004 3315 0 3,315 155.22
2005 5163 0.02 5,163 54.49
2006 1411 45.45 1,456 54.05
2007 4438 4.41 4,442 91.19
2008 3681 225.33 3,906 12.9
2009 2923 129.46 3,052 56.02
2010 3,681 33.6 3,715 22.32
 136-vi

Jute Bags Rope

Year Domestic Total
Production1 Import2 Suppl Imports2
y
2011 3681 2049.77 5,731 25.58

Source: - 1 .CSA, Report on Large and Medium Scale Manufacturing Industries Survey:
2. Ethiopian Revenues & Customs Authority

As could be seen form Table 3.1, though the total supply of jute bags fluctuate from year to year
has registered an average annual growth rate of 16.72%. However, import of twine and rope
shows a declining trend. Annual average import which was 219 tons during the period 2000-
2004 has declined to an annual average of 45 tons during 2005-2011.

Accordingly, based on the nature of the data for jute bags the average import of the product
during the recent three years (2009-2011) and for twine ropes the average import during the
period under reference (2000-2011) is a reasonable approximate of the present unsatisfied
demand.

Thus, the current unsatisfied demand for jute bags and twine ropes is estimated at 738 tons and
118 tons, respectively.

2. Projected Demand

The demand for jute bags depends on economic growth, i.e., the production of agricultural and
industrial products that use jute bags and twine ropes for packaging.

Given the rapid economic growth a modest 10% average annual growth rate is considered in
projecting the unsatisfied demand for jute bags and twine ropes. The projected unsatisfied
demand for the products is shown in Table 3.2.

Table 3.2
PROJECTED UNSATISFIED DEMAND FOR JUTE BAGS AND TWINE ROPES (TONS)
 136-vii

Year Projected
Demand
Jute Twine
bag rope
2013 812 130
2014 893 143
2015 982 157
2016 1081 173
2017 1189 190
2018 1307 209
2019 1438 230
2020 1582 253
2021 1740 278
2022 1914 306

3. Pricing & Distribution

According to CSA`s Report on Large and Medium Scale Manufacturing and Electricity
Industries Survey, the average producer’s price of jute bag in 2010 was Birr 32,525 per ton.
Allowing a modest estimate of an annual 10% rise in prices, the current factory gate price for the
envisaged plant is estimated at Birr 35,778 per ton.

Based on the customs data for 2011 (the latest data available), the CIF price of twine ropes was
Birr 39,221 per ton. Allowing 20% for import duty and other clearing expensed, the factory gate
price for the envisaged plant is estimated at Birr 47,065 per ton.

The products can find their market outlet through the existing jute bags & rope wholesale and
retail channels. For bulk purchasers it can be sold directly from the factory.
 136-viii

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

The envisaged plant would have a capacity of 450 tons of jute bags and twine rope per year. The
plant operates single shift of 8 hours per day and 300 working days per annum.

2. Production Program

Considering the time required for penetrating the market, the envisaged plant will start operation
at 75% of capacity during the first year. Then production will grow to 85% and 100% of
capacity during the second and third year, respectively. The program is scheduled based on the
consideration that the envisaged plant will work 300 days in a year in 1 shift, where the
remaining days will be holidays and for maintenance. This consideration is developed based on
the assumption that market and logistics barriers would take place for the first two years of
operation. Table 3.3 below shows production build-up program.

Table 3.3
PRODUCTION PROGRAM
Year 1 2 3 and above
Capacity utilization (%) 75 85 100
Jute bag 225 255 300
Twine and rope 112.5 127.5 150
Total Production (tons) 337.5 382.5 450

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

 136-ix

The required raw material for the manufacturing of jute bag/hessian cloth and twine rope is jute
fiber. The required amount of raw material at full capacity production is 1.65tons/day. The
annual requirements of raw and auxiliary materials along with corresponding costs at full
capacity operation are shown in Table 4.1.

Table 4.1
ANNUAL REQUIREMENT AND COST OF RAW AND AUXILIARY MATERIALS

Sr. Description Qty Cost (‘000 Birr)

No. FC LC TC
1 Jute (ton) 495 6,880.49 6,880.49
2 Lubrication/softening (ton) 10 2,000.00 2,000.00
2 Packing and labeling material(LS) 33.00 33.00
Total 33.00 33

B. UTILITIES

Utilities required are electricity and water. The annual quantities and cost of utilities are
estimated as shown in Table 4.2

Table 4.2

ANNUAL UTILITY REQUIREMENT

Sr. Cost (000 Birr)
Description Qty
No. F.C L.C Total
1 Electric Power (kWh) 42,000 24.36 24.36
2 Water (m3) 1,000 10.00 10.00
Total 34.36

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process
 136-x

The process of jute is started with the selection of the jute, softening and lubrication,
conditioning/piling, carding (breaker and finisher), drawing, spinning, winding,
beaming/dressing, weaving, damping, calendaring, lapping, cutting, Hemming/Heracles sewing,
baling, and the desired end product.

2. Environmental Impact Assessment

The process of the envisaged plant involves such major operation as softening, breaking,
drawing, weaving and sewing. Such operations do not have any adverse effect to the
environment.

B. ENGINEERING

1. Machinery and Equipment

The total cost of machinery and equipment is estimated at Birr 7,158,322 of which Birr
5,010,825 is required in foreign currency. The list of the required plant machinery and equipment
is given in Table 5.1.

Table 5.1
LIST OF MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr.
No. Description Qty.
Softening machine 1
Gear pump
1 Vat jet sprayer
Nozzle
Emulsion tank
Jacket
2 Carding Machine 1
Breaker carding
 136-xi

Sr.
No. Description Qty.
Inner carding
Finisher carding
Drawing machine(first &
second) 1
-delivery roller
-pressing roller
3 -retaining roller
-faller screw roller
-check spring
-crimpling box
Spinning machine 1
4
bobbins LS
Winder machine 1
-spool winder
5
-cop winder
-spindles LS
6 Beam/dressing machine 1
7 Weaving machine 1
8 Calendaring machine 1
9 Lapping machine 1
10 Cutting machine 1
11 Sewing machine 1
12 Press(baling) m/c 1

2. Land, Building and Civil Works

Taking into consideration space for easy movement and possible future expansion, the total area
of the project will be 1,500 square meters. The production building will be one-storied steel
 136-xii

frame building will be suitable. The floor space required 900 m 2. The walls will be plastered,
reinforced concrete floor and RHS truss and EGGA sheet roof. The total building and
construction cost at a unit cost of Birr 5,000 is estimated at about Birr 4.5 million

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation No
721/2004) in principle, urban land permit by lease is on auction or negotiation basis, however,
the time and condition of applying the proclamation shall be determined by the concerned
regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease prices. The
lease period ranges from 99 years for education, cultural research health, sport, NGO , religious
and residential area to 80 years for industry and 70 years for trade while the lease payment
period ranges from 10 years to 60 years based on the towns grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the entire
amount of the lease will receive 0.5% discount from the total lease value and those that pay in
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
 136-xiii

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 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 m 2 (see
Table 5.2).

Table 5.2
NEW LAND LEASE FLOOR PRICE FOR PLOTS IN ADDIS ABABA

Floor
Zone Level Price/m2
Central Market
1st 1686
District
2nd 1535
3rd 1323
 136-xiv

Floor
Zone Level Price/m2
4th 1085
5th 894
1st 1035
2nd 935
Transitional zone 3rd 809
4th 685
5th 555
1st 355
2nd 299
Expansion zone
3rd 217
4th 191

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

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period and
extending the lease payment period. The criterions are creation of job opportunity, foreign
exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.3
shows incentives for lease payment.

Table 5.3
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS
Payment Down
Grace Completion Paymen
Scored Point Period Period t
Above 75% 5 Years 30 Years 10%
 136-xv

From 50 - 75% 5 Years 28 Years 10%

From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile, the average i.e. five years grace period, 28 years payment
completion period and 10% down payment is used. The land lease period for industry is 60
years.

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 399,000 of
which 10% or Birr 39,900 will be paid in advance. The remaining Birr 359,100 will be paid in
equal installments with in 28 years i.e. Birr 12,825 annually.

VI. HUMANNRESOURCE AND TRAINING REQUIREMENT

A. HUMANNRESOURCE REQUIREMENT

The total number of employees required is 45. Annual cost of labor is Birr 1,112,740. The human
resource requirement for the envisaged jute bags and twine rope plant is shown in Table 6.1
Table 6.1
HUMANNR ESOURCE REQUIREMENT AND LABOR COST

No. Job Title No. of Salary (Birr)

Persons Monthly Annual
1 General Manager 1 5,000 60,000
2 Secretary 1 1,500 18,000
3 Production & Technical Head 1 4,000 48,000
4 Commercial Head 1 4,000 48,000
5 Finance & Administration Head 1 4,000 48,000
6 Personnel 1 3,200 38,400
7 Accountant 1 2,500 30,000
8 Accounts Clerk 1 1,800 21,600
9 Cashier 1 1,400 16,800
 136-xvi

No. Job Title No. of Salary (Birr)

Persons Monthly Annual
10 Sales person 1 2,000 24,000
11 Purchaser 1 2,000 24,000
12 Store Keeper 1 1,400 16,800
13 Quality Controller 1 3,000 36,000
14 Shift Leader 1 2,400 28,800
15 Operator(knitting department) 15 18,,000 216,000
17 Laborer 10 8,000 96,400
18 Mechanic 1 2,000 24,000
19 Electrician 1 2,000 24,000
20 Driver 1 1,200 14,400
21 Guard 2 1,600 19,200
Sub – Total 45 852400
Employee’s Benefit 15% basic 145,140
salary
Grand Total 1,112,740

B. TRAINING REQUIREMENT

Training of key personnel, supervisors, skilled workers, and quality control workers, shall be
conducted. The training should primarily focus on the production technology and trouble
shooting. The training will be sufficient during commissioning and start up period by the
machinery suppliers and experts. Total training cost is estimated at about 180,000 Birr.

VII. FINANCIAL ANALYSIS

The financial analysis of the jute bags, hessian cloth & twine rope project is based on the data
presented in the previous chapters and the following assumptions:-

Construction period 1 year

 136-xvii

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 16.95
million (See Table 7.1). From the total investment cost the highest share (Birr 12.85 million or
75.80%) is accounted by fixed investment cost followed by initial working capital (Birr 2.18
million or 12.89%) and pre operation cost (Birr 1.92 million or 11.31%). From the total
investment cost Birr 5.01 million or 29.56% is required in foreign currency.
 136-xviii

Table 7.1

INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Local Foreign Total %

No Cost Items Cost Cost Cost Share
1 Fixed investment
1.1 Land Lease 39.90 39.90 0.24
1.2 Building and civil work 4,500.00 4,500.00 26.55
1.3 Machinery and equipment 2,147.50 5,010.83 7,158.32 42.23
1.4 Vehicles 900.00 900.00 5.31
1.5 Office furniture and equipment 250.00 250.00 1.48
Sub total 7,837.40 5,010.83 12,848.22 75.80
2 Pre operating cost *
2.1 Pre operating cost 807.92 807.92 4.77
2.2 Interest during construction 1,108.81 1,108.81 6.54
Sub total 1,916.73 1,916.73 11.31
3 Working capital ** 2,183.96 2,183.96 12.89
Grand Total 11,938.08 5,010.83 16,948.90 100
* 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 3.16 million. However,
only the initial working capital of Birr 2.18 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 14.31 million (see Table
7.2). The cost of raw material account for 62.28% of the production cost. The other major
 136-xix

components of the production cost are depreciation, financial cost, labor and cost of marketing
and distribution which account for 13.82%, 6.39%, 6.76%, and 5.24% respectively. The
remaining 5.45% is the share of utility, repair and maintenance, labor overhead and
administration cost. For detail production cost see Appendix 7.A.2.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (year four)

Items Cost
( 000 Birr) %
Raw Material and Inputs
8,913 62.28
Utilities
34 0.24
Maintenance and repair
358 2.50
Labor direct
968 6.76
Labor overheads
145 1.01
Administration Costs
250 1.75
Land lease cost
0 0.00
Cost of marketing and distribution
750 5.24
Total Operating Costs
11,418 79.78
Depreciation
1,978 13.82
Cost of Finance
915 6.39
Total Production Cost
14,311 100.00

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit throughout its
operation life. Annual net profit after tax will grow from Birr 3.88 million to Birr 4.31 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 42.51 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4 respectively.
 136-xx

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 7,473,060
Variable Margin ratio (%)
Break Even Capacity utilization = Break Even Sales Value X 100 = 38.29 %
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 3 years.

5. Internal Rate of Return

 136-xxi

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 33.50% indicating the viability of the
project.

6. Net Present Value

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

Accordingly, the net present value of the project at 10% discount rate is found to be Birr 20.25
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 45 persons. The project will generate Birr 8.78 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 forward
linkage with the textile sub sector and also generates other income for the Government.
 136-xxii

Appendix 7.A

FINANCIAL ANALYSES SUPPORTING TABLES

 136-22

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
1,559.7 1,782.6 2,005.4 2,228.2 2,228.2 2,228.2 2,228.2 2,228.2 2,228.2 2,228.2
Total inventory 8 0 3 5 5 5 5 5 5 5

Accounts receivable 684.80 773.70 862.60 951.50 952.57 952.57 952.57 952.57 952.57 952.57

Cash-in-hand 16.73 19.12 21.51 23.90 24.08 24.08 24.08 24.08 24.08 24.08
2,261.3 2,575.4 2,889.5 3,203.6 3,204.9 3,204.9 3,204.9 3,204.9 3,204.9 3,204.9
CURRENT ASSETS 1 2 4 5 0 0 0 0 0 0

Accounts payable 77.35 88.40 99.45 110.50 110.50 110.50 110.50 110.50 110.50 110.50
CURRENT
LIABILITIES 77.35 88.40 99.45 110.50 110.50 110.50 110.50 110.50 110.50 110.50
TOTAL WORKING 2,183.9 2,487.0 2,790.0 3,093.1 3,094.4 3,094.4 3,094.4 3,094.4 3,094.4 3,094.4
CAPITAL 6 2 9 5 0 0 0 0 0 0
 136-23

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

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

Raw Material and Inputs 6,239 7,130 8,022 8,913 8,913 8,913 8,913 8,913 8,913 8,913

Utilities 24 27 31 34 34 34 34 34 34 34

Maintenance and repair 251 286 322 358 358 358 358 358 358 358

Labour direct 678 774 871 968 968 968 968 968 968 968

Labour overheads 102 116 131 145 145 145 145 145 145 145

Administration Costs 175 200 225 250 250 250 250 250 250 250

Land lease cost 0 0 0 0 13 13 13 13 13 13

Cost of marketing
and distribution 750 750 750 750 750 750 750 750 750 750

Total Operating Costs 8,218 9,284 10,351 11,418 11,431 11,431 11,431 11,431 11,431 11,431

Depreciation 1,978 1,978 1,978 1,978 1,978 205 205 205 205 205

Cost of Finance 0 1,220 1,067 915 762 610 457 305 152 0

Total Production Cost 10,196 12,482 13,397 14,311 14,171 12,246 12,093 11,941 11,788 11,636
 136-24

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
12,45 16,01 17,79 17,79 17,79 17,79 17,79 17,79
Sales revenue 5 4 3 3 3 3 3 3 17,793 17,793
10,66 10,66 10,66 10,66 10,66
Less variable costs 7,468 8,534 9,601 8 8 8 8 8 10,668 10,668

VARIABLE MARGIN 4,987 7,480 8,192 7,125 7,125 7,125 7,125 7,125 7,125 7,125
in % of sales revenue 40.04 46.71 46.04 40.04 40.04 40.04 40.04 40.04 40.04 40.04
Less fixed costs 2,728 2,728 2,728 2,728 2,741 968 968 968 968 968

OPERATIONAL MARGIN 2,259 4,751 5,464 4,397 4,384 6,157 6,157 6,157 6,157 6,157
in % of sales revenue 18.14 29.67 30.71 24.71 24.64 34.60 34.60 34.60 34.60 34.60
Financial costs 1,220 1,067 915 762 610 457 305 152 0
GROSS PROFIT 2,259 3,532 4,396 3,482 3,622 5,547 5,700 5,852 6,005 6,157
in % of sales revenue 18.14 22.05 24.71 19.57 20.35 31.18 32.03 32.89 33.75 34.60
Income (corporate) tax 0 0 0 0 0 1,664 1,710 1,756 1,801 1,847
NET PROFIT 2,259 3,532 4,396 3,482 3,622 3,883 3,990 4,097 4,203 4,310
in % of sales revenue 18.14 22.05 24.71 19.57 20.35 21.82 22.42 23.02 23.62 24.22
 136-25

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

Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Scrap
TOTAL CASH INFLOW 13,656 15,825 16,025 17,804 17,793 17,793 17,793 17,793 17,793 17,793 17,793 6,943
Inflow funds 13,656 3,370 11 11 0 0 0 0 0 0 0 0
Inflow operation 0 12,455 16,014 17,793 17,793 17,793 17,793 17,793 17,793 17,793 17,793 0
Other income 0 0 0 0 0 0 0 0 0 0 0 6,943
TOTAL CASH
OUTFLOW 13,656 11,588 12,343 13,257 14,171 13,719 15,229 15,123 15,016 14,909 13,278 0
Increase in fixed assets 13,656 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 2,261 314 314 314 1 0 0 0 0 0 0
Operating costs 0 7,468 8,534 9,601 10,668 10,681 10,681 10,681 10,681 10,681 10,681 0
Marketing and
Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income tax 0 0 0 0 0 0 1,664 1,710 1,756 1,801 1,847 0
Financial costs 0 1,109 1,220 1,067 915 762 610 457 305 152 0 0
Loan repayment 0 0 1,525 1,525 1,525 1,525 1,525 1,525 1,525 1,525 0 0
SURPLUS (DEFICIT) 0 4,237 3,682 4,547 3,622 4,074 2,564 2,670 2,777 2,884 4,515 6,943
CUMULATIVE CASH
BALANCE 0 4,237 7,920 12,467 16,088 20,162 22,726 25,396 28,173 31,056 35,572 42,515
 136-26

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

Year Year Year Year Year Scra

Item Year 1 2 Year 3 4 Year 5 6 Year 7 8 Year 9 10 Year 11 p
TOTAL CASH INFLOW 0 12,455 16,014 17,793 17,793 17,793 17,793 17,793 17,793 17,793 17,793 6,943
Inflow operation 0 12,455 16,014 17,793 17,793 17,793 17,793 17,793 17,793 17,793 17,793 0
Other income 0 0 0 0 0 0 0 0 0 0 0 6,943

TOTAL CASH OUTFLOW 15,840 8,521 9,587 10,654 11,419 11,431 13,095 13,141 13,187 13,232 13,278 0
Increase in fixed assets 13,656 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 2,184 303 303 303 1 0 0 0 0 0 0 0
Operating costs 0 7,468 8,534 9,601 10,668 10,681 10,681 10,681 10,681 10,681 10,681 0

Marketing and Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income (corporate) tax 0 0 0 0 0 1,664 1,710 1,756 1,801 1,847 0

NET CASH FLOW -15,840 3,934 6,427 7,139 6,374 6,362 4,698 4,652 4,606 4,561 4,515 6,943
- 44,37
CUMULATIVE NET CASH FLOW -15,840 11,906 -5,479 1,660 8,033 14,395 19,093 23,746 28,352 32,913 37,428 1
Net present value -15,840 3,577 5,311 5,363 4,353 3,950 2,652 2,387 2,149 1,934 1,741 2,677
- 20,25
Cumulative net present value -15,840 12,263 -6,952 -1,589 2,765 6,715 9,367 11,754 13,903 15,837 17,578 5

NET PRESENT VALUE 20,255

INTERNAL RATE OF RETURN 33.50%
NORMAL PAYBACK 3 years