6.

PROFILE ON THE PRODUCTION

OF CANNED MEAT
 6-1

TABLE OF CONTENTS

PAGE

I. SUMMARY 6-2

II. PRODUCT DESCRIPTION & APPLICATION 6-2

III. MARKET STUDY AND PLANT CAPACITY 6-3

A. MARKET STUDY 6-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 6-7

IV. MATERIALS AND INPUTS 6-8

A. RAW & AUXILIARY MATERIALS 6-8
B. UTILITIES 6-9

V. TECHNOLOGY & ENGINEERING 6-10

A. TECHNOLOGY 6-10
B. ENGINEERING 6-11

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 6-17

A. HUMAN RESOURCE REQUIREMENT 6-17
B. TRAINING REQUIREMENT 6-18

VII. FINANCIAL ANLYSIS 6-18

A. TOTAL INITIAL INVESTMENT COST 6-18
B. PRODUCTION COST 6-20
C. FINANCIAL EVALUATION 6-20
D. ECONOMIC & SOCIAL BENEFITS 6-22
 6-2

I. SUMMARY

This profile envisages the establishment of a plant for the production of canned meat with
a capacity of 1,000 tons per annum. Canned meat is a highly nutritive product prepared
from beef, pig and other ingredients used for preserving and giving suitable taste.

The country`s requirement of canned meat is met through local production and import.
The present (2012) demand for canned meat is estimated at 2,027 tons. The demand for
the product is projected to reach 3,509 tons and 7,073 tons by the years 2017 and 2022,
respectively.

The principal raw materials required are oxen (bulls, bullocks) and cows and table salt
which are locally available.

The total investment cost of the project is estimated at Birr 48.50 million. From the total
investment cost the highest share (Birr 26 million or 53.61%) is accounted by fixed
investment cost followed by initial working capital (Birr 18.37 million or 37.88%) and
pre operation cost (Birr 4.12 million or 8.51%). From the total investment cost, Birr
10.98 million or 22.64% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 31.16% and a net
present value (NPV) of Birr 56.60 million, discounted at 10%.

The project can create employment for 87 persons. The establishment of such factory
will have a foreign exchange saving and earning effect to the country by substituting the
current imports and exporting its product to the international market. The project will also
create backward linkage with the livestock sector and also generates income for the
Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Canned meat is a highly nutritive product prepared from beef, pig and other ingredients
used for preserving and giving suitable taste. Processed and packed meat now a day is
used in hospitals, hotels, restaurants, clubs and supermarkets. Moreover, it has an export
market potential. The major raw materials required are cattle meat and table salt. There
 6-3

is a considerable amount of livestock in our country that could support a meat processing
plant. The plant will have a backward linkage effect with the livestock sector. Canned
cattle meat is a resource based product that will have an export potential.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Although Ethiopia has huge cattle population, the economic benefit derived from its
cattle production do not commensurate with this potential and the potential has largely
remained untapped. A part from direct consumption, cattle production provides good
opportunity for processing and value adding. There is some domestic production of
canned meat production mainly utilized by defense force. Data on canned meat
production together with shiro is presented in Table 3.1.

Table 3.1
DOMESTIC PRODUCTION OF ZIGNI (CANNED MEAT) AND SHIRO (TONS)

Year Production
2001/02 2,589
2002/03 2,465
2003/04 1,846
2004/05 374
2005/06 374
2006/07 811
2007/08 531
2008/09 623
2009/10 834

Source: -CSA, Large and Medium Scale Manufacturing and Electricity Industries
Survey, Various issues.
 6-4

It can be observed from Table 3.1 that production of Zigin (canned meat) and Shiro,
which was 2,589 tons at the beginning of the period considered (2001/02) ,has fallen to
834 tons by the end of the decade (2009/10). A closer look at the data reveals that the
pattern of production is characterized by a decline (by an average of -36%) in 2001/02-
2004/05 interval and a rebounding starting 2006/07(by an average of 5%). The average
growth rate of most recent 4 years was applied on 2009/10 production to estimate year
2012 production. Accordingly, production of Zigin and Shiro in 2012 was estimated at
920 tons. According to knowledgeable people in the industry, the share of Zigin (canned
meat) is about 35%. Hence, domestic production of canned meat in 2012 is estimated at
322 tons.

One of the way to benefit the country from the product under consideration is exploiting
international markets and thereby increasing its foreign exchange earnings. Ethiopia
exports live animals and meat. But it also imports meat preparations. Cattle meat export
and import data of recent years is shown in Table 3.2.

Table 3.2
EXPORT AND IMPORT OF MEAT AND MEAT PREPARATIONS (TONS)

Year Import Export

2001 6.0 9.3
2002 1.4 17.2
2003 0.5 -
2004 1.4 1.0
2005 2.4 12.4
2006 2.4 16.7
2007 10.0 10.3
2008 8.0 -
2009 8.0 -
2010 13.0 684.5
2011 9.0 2,737.0

Source: - Ethiopian Customs and Revenue Authority.

 6-5

Import of canned meat in the past eleven years has shown a general increasing trend,
although it is characterized by fluctuations. During the period 2001--2006 imported
quantity of canned meat ranged from the lowest 0.5 tons (year 2003) to the highest 6 tons
(year 2001), with annual average of 2.4 tones. A substantial growth of import is observed
during the period 2007--2011.During this period imported quantity ranged from the
lowest 8 tons (years 2008/09) to the highest 13 tones (year 2010), with a yearly average
of 9.6 tons. This is higher by four fold compared to the previous six years average.

Hence, it was found appropriate to take average of the most recent three years data in
estimating the 2012 import level. Accordingly, import level of 2012 was estimated at 10
tons.

Therefore, aggregate supply or domestic apparent consumption for the year 2012 is
computed as 332 tons by adding the estimated domestic production and import.

Export of meat from Ethiopia was characterized by high fluctuations. During the years of
2003, 2008 and 2009, there was no export. During the years between 2001 and 2007, the
imported quantity ranged from one ton to 17.2 tons, with a yearly average export of about
only 10 tons. this is a very small amount compared to the country`s livestock potential.

In the remaining recent two years i.e. 2010 & 2011, exported quantity suddenly increased
to a level of 685 tons and 2,737 tons, respectively. This pattern believed to be the result
of sporadic import bans imposed by some Middle East countries related to fear of risk of
health emanating from animal disease. Therefore, due to such nature of export data, to
estimate the demand for the 2012 it was found more appropriate to take average of the
last two years export. Hence, the present (2012) export demand for canned meat is
estimated at 1,710 tons.

Thus, summing up domestic production, exports and imports the present effective
demand (2012) for canned meat is estimated at 2,027 tons.
 6-6

2. Demand Projection

The domestic demand for canned meat grows with urban population growth and growth
in income per capita. Urban population in Ethiopia is growing by more that 4% per
annum. Considering this, and assuming a modest growth in per capita income, demand
for canned meat is forecasted to grow by 4%. Domestic production is assumed to be
maintained at 2012 estimated level i.e., 322 tons. This will result in 335 tons and 13 tons
of projected domestic demand and unsatisfied demand for canned meat in 2013.

Ethiopia’s physical location and huge livestock resource gives it a comparative advantage
to exploit nearby meat export markets. These markets include Middle East and North
Africa as well as Central and West Africa. There are promising but yet unexploited
markets in other Middle Eastern countries in addition to those that the country has been
traditionally associated with (MoARD 2004c). The Growth and transformation (GTP)
plan of the Ethiopian government targets to earn 1Billon US Dollars from export of live
animal and meat (meat products) by the end of plan period. Towards this end support and
facilitation activities are currently underway. Considering these factors the future export
market demand for canned meat is projected conservatively by applying a growth rate of
15% per annum (see Table 3.3)
 6-7

Table 3.3
PROJECTED DEMAND (TONS)

Year Unsatisfied Export Total

Domestic Demand Unsatisfied
Demand Demand
2013 13 1,967 1,980
2014 26 2,261 2,287
2015 40 2,600 2,640
2016 55 2,990 3,045
2017 70 3,439 3,509
2018 86 3,955 4,041
2019 102 4,548 4,650
2020 119 5,231 5,350
2021 136 6,016 6,152
2022 155 6,918 7,073

3. Pricing and Distribution

Currently, the price of canned meat in supermarkets on average is Birr 170 /kg.
Considering 30% margin for whole sellers and retailers, the proposed project is
recommended to set its ex-factory price at Birr 130.70/kg.

The product can be distributed through wholesale- retail chain (such as supermarkets &
groceries) domestically as it has to reach wide range of consumers in several towns. For
export purpose, it is recommended that the factory engage in exporting the product by
itself.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

Based on the outcome of the market study depicted above and the availability of the main
raw material (cattle) in Ethiopia, the envisaged plant will have a capacity of 1,000 tons of
canned meat per annum. This capacity is proposed on the basis of a single shift of 8 hours
per day and 300 working days per annum.
 6-8

2. Production Program

The plant is assumed to start production at 80% of its rated capacity which will grow to
90% in the second year. Full capacity production will be attained in the third year and
onwards. Details of the annual production program are shown in Table 3.3.

Table 3.4

ANNUAL PRODUCTION PROGRAM

Sr. Description Unit of Production Year

No. Measure 1st 2nd 3rd &
Onwards
1 Canned meat ton 800 900 1,000
2 Capacity % 80 90 100
utilization rate

IV. MATERIALS AND INPUTS

A. RAW MATERIALS
The major raw materials required for canned meat plant are oxen (bulls, bullocks) and
cows and table salt. The country has a high cattle population; table salt also is available
locally. The annual requirement for raw materials at full capacity production of the
envisaged plant and the estimated costs are presented in Table 4.1.

Table 4.1
ANNUAL RAW MATERIALS REQUIREMENT AT FULL CAPACITY AND
ESTIMATED COST

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

No. Measure Qty. Price, F. C. L.C. Total
Birr/Unit
1 Cattle head 7,200 8,500.00 61,200.00 61,200.00
2 Table salt kg 1,000 2.50 2.50 2.50
Total 61,202.50 61,202.50
 6-9

The major auxiliary materials required for the plant include cans and carton boxes. The
annual requirement for auxiliary materials at full production capacity of the envisaged
plant, along with the estimated costs is given in Table 4.2.

Table 4.2
ANNUAL AUXILIARY MATERIALS REQUIREMENT AND
COST(PECIES)

Sr. Unit of Required Unit Price,

No. Description Measure Qty. Birr/Unit Total
1 Metallic can Pc 1,800,000 2.00 3,600.0
2 Carton box Pc 150,000 14.00 2,100.0
Total 5,700.0

B. UTILITIES

The utilities required for the plant are electric power, water and furnace oil. The total
annual requirement for power and utilities at full capacity production of the plant along
with the estimated costs is shown in Table 4.3.

Table 4.3

ANNUAL UTILITIES REQUIREMENT AND ESTIMATED COST

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

No. Measure Qty Price, F.C. L.C. Total
Birr/Unit
1 Electric power kWh 150,000 0.5778 86.67 86.67
2 Water m3 35,000 10.00 350.00 350.00
3 Furnace oil Lt 200,000 14.34 2,868.00 2868.00
Total 3,304.67 3,304.67
 6-10

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The cattle supplied to the slaughterhouse are weighed on a cattle balance and then
unloaded along the reception ramp into pens for rest.

Then the cattle undergo a medical check up for the presence of any disease before they
are slaughtered. Each head is stunned by a gun in a box and afterwards slaughtered and
removed to the bleeding line where blood is collected in a basin. The carcasses are loaded
by electric hoist from the slaughter line to the processing line. Loading, spreading of rear
legs and de - hiding are carried out on a three level platform, and final de - hiding done
on a two level platform by means of a pneumatic knife.

The horns are removed by electric saw, and the heads inspected and washed. The brisket
is opened by electric saw, the entails inspected and extracted. Stomach and casings are
conveyed for cleaning. Carcasses are split into halves, which are washed and inspected.
The meat is cut on tables in a cutting room by means of electric or hand operated saws
and knives. Then, the meat is washed to remove blood and kept in the chilled room.

The meat is then dressed and superficial fat is removed before processing further after
trimming and chopping. The bones are removed and the meat is then cut to uniform size
of sliced chunks of 1.25 cm thickness. The meat is then soaked into salt water for giving
a salty taste and to kill the microorganisms. It is weighed and filled into cans and
seaming process will be carried out. After seaming the cans are fed into a jet - spraying
can washer for cleansing with a neutral cleanser. Then, the seamed cans undergo
sterilization immediately. The by - products of cattle meat canning industry represent a
substantial part of the sales value of production derived from the slaughter of cattle. The
by - products include edible fat, non - edible fat, hides, blood, bone meal, glue, etc. The
efficient utilization of by - products is essential for the economic operation of a meat
 6-11

canning plant. The total annual revenue obtained from the sales of these by - products is
estimated at Birr 2,394,000.

The waste water treatment plant that uses physic – chemical system in order to abate the
environmental pollution is considered to be the necessary part of the plant operation. The
treatment process involves settling, filtration, addition of flocculates and mixing, and
floatation. The sludge from the waste water treatment plant can be used as fertilizer.

2. Environmental Impact

Since the envisaged plant includes the waste water treatment system, it does not have any
adverse impact on the environment. The cost of waste water treatment system is included in
the list of machinery and equipment. Thus, the project is environment friendly.

B. ENGINEERING

1. Machinery and Equipment

The list of plant machinery and equipment required for the envisaged project and the
estimated costs are given in Table 5.1.
 6-12

Table 5.1
LIST OF MACHINERY AND EQUIPMENT AND ESTIMATED COST

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

No. Measure Qty. Price, F.C. L.C. Total
Birr/Unit
1 Electric hoist set 4 420.00 105.00 525.00
2 Stunning box set 1 315.00 78.75 393.75
3 Stunning gun set 1 315.00 78.75 393.75
4 Platform for cattle set 7 420.00 105.00 525.00
processing
5 Electric saw for set 4 420.00 105.00 525.00
cutting and splitting
6 Pneumatic knife set 1 420.00 105.00 525.00
7 Hooks for various pc 260 315.00 78.75 393.75
purposes
8 Pneumatic spreader set 1 420.00 105.00 525.00
9 Sterilizer for set 5 525.00 131.25 656.25
processing tools
10 Processing and set 13 315.00 78.75 393.75
inspection table
11 Pipe rail with m 650 420.00 105.00 525.00
supporting
construction
12 Rail balance, up to set 2 420.00 105.00 525.00
500kg
13 Cattle balance, up to set 1 630.00 157.50 787.50
2000kg
14 Floor balance, up to set 1 420.00 105.00 525.00
200kg
15 Machine for washing set 1 525.00 131.25 656.25
and cleaning of
stomach
16 Devise for casing set 1 315.00 78.75 393.75
processing
17 High effect pump for set 2 420.00 105.00 525.00
washing
18 Pump for discharging set 2 315.00 78.75 393.75
manure
19 Laboratory equipment set 1 420.00 105.00 525.00
20 Stainless steel tank set 2 315.00 78.75 393.75
21 Gear pump set 1 315.00 78.75 393.75
22 Balance set 20 210.00 52.50 262.50
 6-13

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

No. Measure Qty. Price, F.C. L.C. Total
Birr/Unit
23 Seaming micrometer set 2 315.00 78.75 393.75
24 Seaming wire gauge set 2 315.00 78.75 393.75
25 Seaming scale set 2 315.00 78.75 393.75
26 Seam band saw frame set 2 315.00 78.75 393.75
27 Seam band saw set 10 315.00 78.75 393.75
28 Vacuum can tester set 2 315.00 78.75 393.75

29 Waste water treatment set 480.00 120.00 600.00

system
Total 10,980.00 2,745.00 13,725.00

2. Land, Buildings and Civil Works

The total area of land required for the envisaged plant is 5,000 m2, of which 2,000 m2 will
be built – up area. The total cost of buildings and civil works at a rate of Birr 4,500 per
square meter is estimated at Birr 9 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
 6-14

banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa, the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
below 5000 m2 the land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the City’s Investment Authority.
However, if the land request is above 5,000 m2 the request is evaluated by the City’s
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

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

The new regulation classified the city into three zones. The first Zone is Central Market
District Zone, which is classified in five levels and the floor land lease price ranges from
Birr 1,686 to Birr 894 per m2. The rate for Central Market District Zone will be
applicable in most areas of the city that are considered to be main business areas that
entertain high level of business activities.
 6-15

The second zone, Transitional Zone, will also have five levels and the floor land lease
price ranges from Birr 1,035 to Birr 555 per m2 .This zone includes places that are
surrounding the city and are occupied by mainly residential units and industries.

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

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

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

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all new manufacturing projects will be located in industrial zones located in
 6-16

expansion zones. Therefore, for this profile a land lease rate of Birr 266 per m2, which is
equivalent to the average floor price of plots located in expansion zone, is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and 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
Grace Completion Down
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

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

Accordingly, the total land lease cost at a rate of Birr 266 per m2 is estimated at Birr
1,330,000 million of which 10% or Birr 133,000 will be paid in advance. The remaining
Birr 1,197,000 will be paid in equal installments with in 28 years i.e. Birr 42,750
annually.
 6-17

VI. HUMAN RESOURCE AND TRAINING REQUIREMENT

A. HUMAN RESOURCE REQUIREMENT

The total human resource required for the envisaged plant will be 87 persons Details of
manpower requirement and estimated annual labor cost along with fringe benefits is
given in Table 6.1.
Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED ANNUAL LABOR COST

Required Salary, Birr

Sr. No. of
No. Job Title Persons Monthly Annual
1 Plant manager 1 4,500 54,000
2 Secretary 1 800 9,600
3 Finance and administration head 1 2,000 24,000
4 Personnel 1 800 9,600
5 Production and technical head 1 2,750 33,000
6 Commercial head 1 2,000 24,000
7 Accountant 2 1,600 19,200
8 Cashier 1 800 9,600
9 Purchaser 1 800 9,600
10 Salesman 2 1,600 19,200
11 Store-keeper 2 1,600 19,200
12 Veterinary doctor 1 2,500 30,000
13 Quality controller/chemist 2 2,000 24,000
14 Food technologist 1 2,000 24,000
15 General mechanic 3 2,400 28,800
16 Assistant mechanic 3 1,500 18,000
17 Electrician 3 2,400 28,800
18 Operator 20 10,000 120,000
19 Laborer 30 12,000 144,000
20 Cleaning worker 3 1,200 14,400
21 Driver 3 2,400 28,800
22 Guard 4 1,600 19,200
Sub - total 87 59,250 711,000
Employees benefit, 20% of basic salary 11,850 142,200
Total 71,100 853,200
 6-18

B. TRAINING REQUIREMENT

The production and technical head, 3 quality controllers, 3 mechanics, 3 electricians and
20 operators should be given three weeks on – the - job training during erection and
commissioning by advanced technician of equipment supplier on production operation
quality control, machinery operation and maintenance. The total cost of training is
estimated at Birr 180,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the canned meat project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity and 70 loan
Tax holidays 3 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 day
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
48.50 million (see Table 7.1). From the total investment cost the highest share (Birr 26
million or 53.61%) is accounted by fixed investment cost followed by initial working
capital (Birr 18.37 million or 37.88%) and pre operation cost (Birr 4.12 million or
8.51%). From the total investment cost, Birr 10.98 million or 22.64% is required in
foreign currency.
 6-19

Table 7.1

INITIAL INVESTMENT COST (‘000 Birr)

Sr. Local Foreign Total %

Cost Items
No. Cost Cost Cost Share
1 Fixed investment
No
1.1 Land Lease
1,330.00 1,330.00 2.74
1.2 Building and civil work
9,000.00 9,000.00 18.55
1.3 Machinery and equipment
2,745.00 10,980.00 13,725.00 28.29
1.4 Vehicles
1,500.00 1,500.00 3.09
1.5 Office furniture and equipment
450.00 450.00 0.93
Sub -total
15,025.00 10,980.00 26,005.00 53.61
2 Pre operating cost *
2.1 Pre operating cost
956.25 790.00 1.63
2.2 Interest during construction
3,173.44 3,173.44 6.54
Sub -total
4,129.69 4,129.69 8.51
3 Working capital **
18,373.67 18,373.67 37.88
Total
37,528.37 10,980.00 48,508.37 100

* 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 22.91 million.
However, only the initial working capital of Birr 18.37 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).
 6-20

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 81.94 million
(see Table 7.2). The cost of raw material account for 81.65% of the production cost. The
other major components of the production cost are depreciation, utility and financial cost
which account for 4.44%, 4.03% and 3.73% respectively. The remaining 6.15% is the
share of labor, repair and maintenance, labor overhead and administration cost. For detail
production cost see Appendix 7.A.2.

Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR THREE)

Items Cost
(in 000 Birr) %
Raw Material and Inputs
66,902.50 81.65
Utilities
3,304.67 4.03
Maintenance and repair
686.25 0.84
Labor direct
711.00 0.87
Labor overheads
142.20 0.17
Administration Costs
1,000.00 1.22
Land lease cost
- -
Cost of marketing and distribution
2,500.00 3.05
Total Operating Costs
75,246.62 91.83
Depreciation
3,641.25 4.44
Cost of Finance
3,054.44 3.73
Total Production Cost
81,942.31 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit
throughout its operation life. Annual net profit after tax ranges from Birr 8.88 million to
 6-21

Birr 12.95 million during the life of the project. Moreover, at the end of the project life
the accumulated net cash flow amounts to Birr 126.31 million. For profit and loss
statement and cash flow projection see Appendix 7.A.3 and 7.A.4, respectively.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets (operating income divided by assets),
return on equity (net profit divided by equity) and return on total investment (net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point for capacity utilization and sales value estimated by using income
statement projection are computed as followed.

Break -Even Sales Value = Fixed Cost + Financial Cost = Birr 26,625,043
Variable Margin ratio (%)

Break- Even Capacity utilization = Break- even Sales Value X 100 = 28%
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
 6-22

by the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this project is computed to be 31.16%
indicating the viability of the project.

6. Net Present Value

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

Accordingly, the net present value of the project at 10% discount rate is found to be Birr
56.60 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 87 persons. The project will generate Birr 34.18
million in terms of tax revenue. The establishment of such factory will have a foreign
exchange saving and earning effect to the country by substituting the current imports and
exporting its product to the international market. The project will also create backward
linkage with the livestock sector and also generates income for the Government in terms
of payroll tax.
 6-23

Appendix 7.A
FINANCIAL ANALYSES SUPPORTING TABLES
 6-24

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

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

Total inventory 13,380.50 15,053.06 16,725.63 16,725.63 16,725.63 16,725.63 16,725.63 16,725.63 16,725.63 16,725.63

Accounts receivable 5,058.11 5,664.33 6,270.55 6,270.55 6,274.11 6,274.11 6,274.11 6,274.11 6,274.11 6,274.11

Cash-in-hand 28.22 31.74 35.27 35.27 35.86 35.86 35.86 35.86 35.86 35.86

CURRENT ASSETS 18,466.82 20,749.14 23,031.45 23,031.45 23,035.60 23,035.60 23,035.60 23,035.60 23,035.60 23,035.60

Accounts payable 93.15 104.79 116.44 116.44 116.44 116.44 116.44 116.44 116.44 116.44

CURRENT
LIABILITIES 93.15 104.79 116.44 116.44 116.44 116.44 116.44 116.44 116.44 116.44

TOTAL WORKING
CAPITAL 18,373.67 20,644.34 22,915.01 22,915.01 22,919.17 22,919.17 22,919.17 22,919.17 22,919.17 22,919.17
 6-25

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

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

Raw Material and Inputs 53,522 60,212 66,903 66,903 66,903 66,903 66,903 66,903 66,903 66,903

Utilities 2,644 2,974 3,305 3,305 3,305 3,305 3,305 3,305 3,305 3,305

Maintenance and repair 549 618 686 686 686 686 686 686 686 686

Labour direct 569 640 711 711 711 711 711 711 711 711

Labour overheads 114 128 142 142 142 142 142 142 142 142

Administration Costs 800 900 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Land lease cost 0 0 0 0 43 43 43 43 43 43

Cost of marketing
and distribution 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500

Total Operating Costs 60,697 67,972 75,247 75,247 75,289 75,289 75,289 75,289 75,289 75,289

Depreciation 3,641 3,641 3,641 3,641 3,641 405 405 405 405 405

Cost of Finance 0 3,491 3,054 2,618 2,182 1,745 1,309 873 436 0

Total Production Cost 64,339 75,104 81,942 81,506 81,112 77,440 77,003 76,567 76,131 75,694
 6-26

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

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

Sales revenue 75,360 84,780 94,200 94,200 94,200 94,200 94,200 94,200 94,200 94,200
Less variable costs 58,197 65,472 72,747 72,747 72,747 72,747 72,747 72,747 72,747 72,747

VARIABLE MARGIN 17,163 19,308 21,453 21,453 21,453 21,453 21,453 21,453 21,453 21,453
in % of sales revenue 22.77 22.77 22.77 22.77 22.77 22.77 22.77 22.77 22.77 22.77
Less fixed costs 6,141 6,141 6,141 6,141 6,184 2,948 2,948 2,948 2,948 2,948

OPERATIONAL MARGIN 11,021 13,167 15,312 15,312 15,269 18,506 18,506 18,506 18,506 18,506
in % of sales revenue 14.63 15.53 16.25 16.25 16.21 19.65 19.65 19.65 19.65 19.65
Financial costs 3,491 3,054 2,618 2,182 1,745 1,309 873 436 0
GROSS PROFIT 11,021 9,676 12,258 12,694 13,088 16,760 17,197 17,633 18,069 18,506
in % of sales revenue 14.63 11.41 13.01 13.48 13.89 17.79 18.26 18.72 19.18 19.65
Income (corporate) tax 0 0 0 3,808 3,926 5,028 5,159 5,290 5,421 5,552
NET PROFIT 11,021 9,676 12,258 8,886 9,161 11,732 12,038 12,343 12,648 12,954
in % of sales revenue 14.63 11.41 13.01 9.43 9.73 12.45 12.78 13.10 13.43 13.75
 6-27

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

Year Year Year Year Year Year Year Year Year Year Year
Item 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH
INFLOW 26,961 97,000 84,792 94,212 94,200 94,200 94,200 94,200 94,200 94,200 94,200 32,823
Inflow funds 26,961 21,640 12 12 0 0 0 0 0 0 0 0
Inflow operation 0 75,360 84,780 94,200 94,200 94,200 94,200 94,200 94,200 94,200 94,200 0
Other income 0 0 0 0 0 0 0 0 0 0 0 32,823
TOTAL CASH
OUTFLOW 26,961 82,338 78,109 84,947 86,036 85,765 86,426 86,121 85,815 85,510 80,841 0
Increase in fixed assets 26,961 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 18,467 2,282 2,282 0 4 0 0 0 0 0 0
Operating costs 0 58,197 65,472 72,747 72,747 72,789 72,789 72,789 72,789 72,789 72,789 0
Marketing and
Distribution cost 0 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 0
Income tax 0 0 0 0 3,808 3,926 5,028 5,159 5,290 5,421 5,552 0
Financial costs 0 3,173 3,491 3,054 2,618 2,182 1,745 1,309 873 436 0 0
Loan repayment 0 0 4,363 4,363 4,363 4,363 4,363 4,363 4,363 4,363 0 0
SURPLUS (DEFICIT) 0 14,663 6,683 9,265 8,164 8,435 7,774 8,079 8,385 8,690 13,359 32,823
CUMULATIVE CASH
BALANCE 0 14,663 21,346 30,611 38,774 47,209 54,983 63,062 71,446 80,137 93,495 126,318
 6-28

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

Year Year Year Year Year Year Year Year Year Year Year
Item 1 2 3 4 5 6 7 8 9 10 11 Scrap
TOTAL CASH INFLOW 0 75,360 84,780 94,200 94,200 94,200 94,200 94,200 94,200 94,200 94,200 32,823

Inflow operation 0 75,360 84,780 94,200 94,200 94,200 94,200 94,200 94,200 94,200 94,200 0

Other income 0 0 0 0 0 0 0 0 0 0 0 32,823

TOTAL CASH OUTFLOW 45,335 62,968 70,243 75,247 79,059 79,216 80,317 80,448 80,579 80,710 80,841 0

Increase in fixed assets 26,961 0 0 0 0 0 0 0 0 0 0 0

Increase in net working capital 18,374 2,271 2,271 0 4 0 0 0 0 0 0 0

Operating costs 0 58,197 65,472 72,747 72,747 72,789 72,789 72,789 72,789 72,789 72,789 0

Marketing and Distribution cost 0 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 0

Income (corporate) tax 0 0 0 3,808 3,926 5,028 5,159 5,290 5,421 5,552 0

NET CASH FLOW -45,335 12,392 14,537 18,953 15,141 14,984 13,883 13,752 13,621 13,490 13,359 32,823
- -
CUMULATIVE NET CASH FLOW -45,335 32,943 18,406 548 15,689 30,673 44,556 58,307 71,928 85,418 98,777 131,600

Net present value -45,335 11,265 12,014 14,240 10,342 9,304 7,836 7,057 6,354 5,721 5,150 12,655
- -
Cumulative net present value -45,335 34,069 22,055 -7,815 2,526 11,830 19,667 26,724 33,078 38,799 43,949 56,604

NET PRESENT VALUE 56,604

INTERNAL RATE OF RETURN 31.16%
NORMAL PAYBACK 4 years