137.

PROFILE ON THE PRODUCTION OF ACRYLIC

FIBER AND YARN
 137-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 137-2

II. PRODUCT DESCRIPTION & APPLICATION 137-2

III. MARKET STUDY AND PLANT CAPACITY 137-3

A. MARKET STUDY 137-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 137-7

IV. MATERIALS AND INPUTS 137-7

A. RAW & AUXILIARY MATERIALS 137-7
B. UTILITIES 137-8

V. TECHNOLOGY & ENGINEERING 137-8

A. TECHNOLOGY 137-8
B. ENGINEERING 137-10

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 137-14

A. HUMAN RESOURCE REQUIREMENT 137-14
B. TRAINING REQUIREMENT 137-14

VII. FINANCIAL ANLYSIS 137-15

A. TOTAL INITIAL INVESTMENT COST 137-16
B. PRODUCTION COST 137-17
C. FINANCIAL EVALUATION 137-17
D. ECONOMIC AND SOCIAL BENEFITS 137-19
 137-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of acrylic fiber and yarn
with a capacity of 168 per annum. Acrylic fiber and yarn is a synthetic fiber and has wide
applications in apparel, fabrics, home furnishings, and in others such as auto tops, awnings,
hand-knitting and craft yarns, and industrial fabrics, filters, paint rollers, stuffed toys.

The demand for acrylic fiber and yarn is met through import and domestic production. The
present (2012) demand for acrylic fiber and yarn is estimated at 15,000 ton. The demand for
acrylic fiber and yarn is projected to reach 22,040 ton and 32,384 ton by the year 2017 and 2022,
respectively.

The principal raw materials required are acrylonitrile, methyl acryl ate and various chemicals
which have to be imported.

The total investment cost of the project including working capital is estimated at Birr 22.03
million. From the total investment cost the highest share (Birr 17.06 million or 77.45%) is
accounted by fixed investment cost followed by initial working capital (Birr 2.87 million or
13.03%) and pre operation cost (Birr 2.10 million or 9.51%). From the total investment cost Birr
8.83 million or 40.10% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 32.96% and a net present
value (NPV) of Birr 25.44 million discounted at 10%.

The project can create employment for 28 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 manufacturing, handicraft, and chemical sub
sector and also generates income for the Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Acrylic is wool like synthetic fiber that was developed by Dupont in 1944 and commercially
produced in 1950. It is soft and warm, wool like, quick drying, resilient, retaining shape and
resistant to moths, sunlight, oil and chemicals. Acrylic has wide applications in apparel (dresses,
 137-iv

infant wear, knitted garments, ski wear, socks, sportswear, sweaters), in fabrics such as simulated
furs and jerseys) in home furnishings (blankets, carpets, draperies, upholstery) and in others
(such as auto tops, awnings, hand-knitting and craft yarns, and industrial fabrics).

Similarly Modacrylic is a soft, resilient, abrasion and flame-resistant material, quick drying,
resistant to acids and alkalis and retaining shape. It has got applications in apparel (deep pile
coats, trims, linings, simulated fur, wigs and hairpieces) in fabrics (fleece fabrics, industrial
fabrics, knit-pile fabric backings, non-woven fabrics) in home furnishings (awnings, blankets,
carpets, flame-resistant draperies and curtains, scatter rugs) and in other uses (such as filters,
paint rollers, stuffed toys etc).

Acrylic yarn appears in Ethiopian market as Multiple or cabled yarn not less than 85% acrylic or
modacrylic staple fibers, single yarn with not less than 85% acrylic or modacrylic staple fibers,
and Yarn less than 85% acrylic or modacrylic staple fibers. However, Multiple or cabled yarn
not less than 85% acrylic or modacrylic staple fibers is the single most used( more than 98%)
acrylic yarn in this market.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

For many years, the demand for acrylic yarn and fiber in Ethiopia was entirely met through
import. However, the production of acrylic yarn by importing in a semi-finished form is
currently undertaken by one privately owned factory although the major part of the demand is
still covered by importing from various countries. A variety of acrylic yarn is imported to the
country which includes the following.
 Acrylic or modacrylic synthetic staple fibers, not carded;
 Acrylic or modacrylic synthetic fibers, carded;
 Single yarn, with greater than 85% acrylic;
 Multiple or cabled yarn of acrylic; and
 Synthetic filament tow of, acrylic or modacrylic.
A ten years series of import data for acrylic yarn and fiber and a five years domestic production
pertaining to acrylic yarn is provided in Table 3.1.
 137-v

Table 3.1
IMPORT OF ACRYLIC YARN AND FIBERS (TONS)
Year Import Domestic Total
Production
2002 5,993 - 5,993
2003 6,189 - 6,189
2004 5,743 - 5,743
2005 7,158 - 7,158
2006 5,136 - 5,136
2007 5,380 3,747 9,127
2008 7,217 3,299 10,516
2009 5,668 N.A 5,668
2010 7,663 10,104 17,767
2011 8,781 2,834 11,615

Source: - For import the Ethiopian Revenues & Customs Authority.

- For domestic production Central Statistical Authority.

The imported quantity of acrylic yarn and fibers has generally shown an increasing trend during
the past ten years although there were some fluctuations. During the period 2002-2011 the
imported quantity ranged from the lowest 5,136 tons (year 2006) to the highest 8,781ton (year
2011). During the past ten years import has registered an annual average growth of 5%.

Local production of acrylic yarn in the past few years has been highly erratic. During year 2007
and 2008 the production level was 3,747 tons and 3,299 tons. As per the data source of the
Central Statistical Authority production in the year 2009 was nil. Surprisingly, the domestic
production sharply increased to a level of 10,104 tons in the year 2010 and again decreased
drastically to a level of 2,834 tons in the following year of 2011.

The lowest and highest apparent consumption (import plus domestic production) in the past five
years were 5,668 tons and 17,767tons in the year 2009 and year 2010, respectively. In the
remaining three years it ranged from 9,127 tons to 11,615 tons.
 137-vi

To estimate the present demand the recent two years average has been taken by considering the
nature of the data. Accordingly, the present demand for acrylic yarn and fibers is set at an
adjusted figure of 15,000.

2. Projected Demand

The demand for acrylic yarn and fibers depends on the performance of the textile sector. In the
past, the sector was beset by diverse problems, the major ones being stiff competition from
legally and illegally imported fabrics and clothing. There are, however, favorable prospects for
the sector stemming from opening of the markets of the United States and the European Union
countries to Ethiopian textile products. The Ethiopian Government is also taking various
supportive initiatives including credit on easy terms and availing land for factory premises to
boost the foreign exchange earning capacity of the sector.
The target set for the industrial sector during the GTP period is to register an average annual
growth rate of 20% and thereby to increase the sector’s share in overall GDP. In this regard
continuous investment support and expansion activities will be carried out by the Government.
Hence, when these factors are taken into account, it won’t be unreasonable to assume that the
demand for acrylic yarn to grow by an average of 8 % per annum. The total demand projection,
the existing domestic capacity and the unsatisfied demand is given in Table 3.2.

Table 3.2
PROJECTED DEMAND FOR ACRYLIC YARN (TONS)

Year Total Projected Existing Unsatisfied

Demand Capacity* Demand
2013 16,200 6,500 9,700
2014 17,496 6,500 10,996
2015 18,895 6,500 12,395
2016 20,407 6,500 13,907
2017 22,040 6,500 15,540
2018 23,803 6,500 17,303
2019 25,707 6,500 19,207
 137-vii

Year Total Projected Existing Unsatisfied

Demand Capacity* Demand

2020 27,764 6,500 21,264

2021 29,985 6,500 23,485
2022 32,384 6,500 25,884
Note: - Existing capacity is assumed 6,500 by taking year 2010 and 2011 actual average
Production.

The unsatisfied demand for acrylic yarn and fiber will increase from 9,700 tons in the year 2013
to 17,303 tons and 25,884 tons during the period 2018 and 2022, respectively.

3. Pricing and Distribution

The current factory gate price of locally produced acrylic yarn is Birr 325 per 2.5 kg.
Accordingly, a factory gate price of Birr 130 per kg is taken for sales revenue projection.

Direct sale to bulk purchasers, such as sweater and hosiery producers, as well as the use of
existing yarn distributing enterprises for small purchasers is recommended.

B. PLANT CAPACITY AND PRODUCION PROGRAM

1. Plant Capacity

Considering the economic scale of production, available technology and production

management, the annual total production capacity of the plant is set to be 168 tons of acrylic
fiber and yarn. The envisaged plant will operate in two shifts eight hours per day for three
hundred days within a year considering 13 holidays and 52 Sunday per year and assuming that
maintenance activities will be performed during off hours and Sunday
 137-viii

2. Production Program

The nature of production of blue acrylic fiber and yarn is mainly processing and it requires
the manpower to take little time until they develop a skill and knowledge of the production
process specification to produce acceptable standard product .The envisaged plant will run in
full load after two years from beginning of operation.

Table 3.3
PRODUCTION PROGRAM

Production Year
No. Description 1 2 3-10
1 Capacity utilization rate (%) 75.00 85.00 100.00
2 Acrylic fiber and yarn (ton) 126.00 142.80 168.00

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The major raw materials required are acrylonitrile, methyl acryl ate and various chemicals which
have to be imported. Annual cost of raw and auxiliary materials is Birr 11,998,810. The direct
and auxiliary raw materials required for annual plant production capacity with their quantity and
related cost is shown in Table 4.1.
Table 4.1
ANNUAL RAW MATERIAL REQUIREMENT AND COST

Unit Cost (`000 Birr )

No Uni Cost
Description Qty
. t ( Birr) / Total
Ton LC FC ( Birr)
1 Acrylonitrile 176 ton 54,000 9,525.60 9,525.60
2 Methyl acryl ate 9 ton 64,800 571.54 571.54
aqueous solution of
3 K2S2O8 4 ton 27,000 119.07 119.07
4 aqueous sodium 4 ton 27,000 108.00 108.00
 137-ix

Unit Cost (`000 Birr )

No Uni Cost
Description Qty Total
. t ( Birr) / LC FC ( Birr)
thiocyanate Ton
5 Sulfuric Acid 3 ton 41,400 109.54 109.54

10,433.7 10,433.7
Total FOB 5 5
1,565.0
7 CIF (15%) 6 1,565.06 1,565.06
1,565.0 10,433.7 11,998.8
Total Raw Material Annual Cost 6 5 1

B. UTILITES

Electricity as a source of energy and water as cleaning agent are the utilities required by the
plant. Annual cost of utilities is estimated at Birr 232,800. The annual consumption and cost for
the envisaged plant at full capacity production as shown in Table 4.2.

Table 4.2
ANNUAL UTILITIES CONSUMPTION & COST

Unit
Cost Total Cost
No ( "000 )
. Description Annual Quantity Unit ( Birr) Birr
kW
1 Electricity 298,000 h 0.58 172.84
2 Water 6,000 m³ 10.00 60.00
Total Annual Cost 232.84

V. TECHNOLOGY AND ENGINNERING

A. TECHNOLOGY

1. Production Process

The production process of acrylic fiber starts by free-radical polymerization in aqueous

suspension. The fibre is produced by dissolving the polymer in a solvent such as N,N-
 137-x

dimethylformamide or aqueous sodium thiocyanate, metering it through a multi-hole spinner and

coagulating the resultant filaments in an aqueous solution of the same solvent (wet spinning) or
evaporating the solvent in a stream of heated inert gas (dry spinning). Washing, stretching, drying
and crimping complete the processing.

The fibre is subjected will be subjected to offering, blending and cleaning and it is fed from the
bales by and during this process any forign impurities are eliminated .Ttrash
falls out of the lattice grid into waste chambers and the opened mass of fibbers further fed to other
section of the opening and blowing range .The mass of fiber is subjected to repetitive
opening ,blending, and cleaning at various section of range .

From blow room cotton is fed automatically through chute duct to carding machine for further
procuring. After opening, blending and cleaning in the blow room the fibre is again subjected to
cleaning of trash. Removal of entangle and separation of small tuffs .The attenuation is achieved by
straightening the product when it is passed through couple of rollers pressed together where the
speed of the preceding pair being less than the follower one then the final product from the draw
frame is ready for spinning.

Spinning machine are fed with the prepared fibres where rotating rollers complete separation in to
fibres and the fibres coming from the opening rollers are drawn by vacuum in to the rotor at fast
speed. The yarn passes through the thread monitor and yarn take up system and wind on cylindrical
paper or plastic tubes to be packed or delivered to the weaving step either in the same compound or
external garment and textile factory.

2. Environmental Impact

In terms of emissions, envisaged plant production is not overly polluting. It is energy-intensive,

but the chemicals used are on a closed-loop and used over and over without needing to be
disposed of. Acrylic fiber and yarn is not biodegradables. So to overcome this environmental
problem the wastes during production should be recycled in the process with no additional
investment for environmental protection
 137-xi

B. ENGINNERING

1. Machinery and Equipment

The total cost of machinery and equipment is estimated at Birr10.16 million. The list of direct
and auxiliary machinery, tools and equipments required for the plant and their estimated cost is
shown in Table 5.1.
Table 5.1
LIST OF MACHINERIES, TOOLS & EQUIPMENTS & COST

Unit Cost Total Cost (000 Birr)

( Birr) Total
No. Description Qty Unit LC FC ( Birr)
Ring Frame
1 Machine 1.00 pcs 1,764,000.00 1,764.00 1,764.00
2 Twisting Machine 1.00 pcs 1,710,000.00 1,710.00 1,710.00
3 Carding Machine 1.00 pcs 1,170,000.00 1,170.00 1,170.00
4 Cheese Winder 1.00 pcs 180,000.00 180.00 180.00
5 Rolling Machine 1.00 pcs 324,000.00 324.00 324.00
Hand Bounding
6 Press 1.00 pcs 90,000.00 90.00 90.00
Injection Machine
7 For Bobbin 1.00 pcs 630,000.00 630.00 630.00
Equipments and
8 Tools 1.00 set 216,000.00 216.00 216.00
Temperature and
Humidity Control
9 Installation 1.00 set 126,000.00 126.00 126.00
10 Milling Machine 1.00 pcs 723,600.00 723.60 723.60
11 Drilling Machine 1.00 pcs 781,650.00 781.65 781.65
12 Welding 1.00 pcs 699,300.00 699.30 699.30
Total 8,414.55 8,414.55
13 Spare parts ( 5%) 420.73 420.73
Total Fob Price 8,835.28 8,835.28
14 CIF (15%) 1,325.29 1,325.29

Total Machinery Cost 1,325.29 8,835.28 10,160.57

 137-xii

2. Land, Building and Civil Works

The envisaged plant requires total land area of 2,000 sq.mt out of which built up area is 1,000
sq.mt and the remaining area will be open for various logistic activities The production and
administration offices will be constructed with in the factory build up area and the view could be
arranged in such a way that the control will be in nearby offices. The total cost of building and
civil work at the rate of Birr 5,000 per m2 is estimated at Birr 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
 137-xiii

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
5,000 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.
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).
 137-xiv

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 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.
 137-xv

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%
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 532,000 of
which 10% or Birr 53,200 will be paid in advance. The remaining Birr 478,800 will be paid in
equal installments with in 28 years i.e. Birr 17,100 annually.

VI. HUMAN RESOURCE AND TRAINING REQUIREMENTS

A. HUMAN RESOURCE REQUIREMENT

The plant will employ a total of 28 persons. The annual labor cost including fringe benefits is
estimated at Birr 624,960. The list of direct and indirect labor requirement and their monthly and
annual cost is shown in Table 6.1.

B. TRAINING REQUIREMENT

Individual operators will be trained during machinery commissioning and erection so that the
operators and mechanics will be hired one month before the project implementation so the
training will be conducted on job base arrangement focused on the production process
parameters and specifications
 137-xvi

Table 6.1
HUMAN RESOURCE REQUIREMENT AND COST
Monthly Salary Annual Salary
No. Description No. ( Birr) ( "000 ) Birr
1 Plant manager 1 6,000.00 72.0
2 Secretary 1 1,500.00 18.0
3 Administration and finance 1 3,500.00 42.0
4 Accountant 1 2,000.00 24.0
5 Mechanic 1 2,200.00 26.4
6 Electrician 1 2,200.00 26.4
7 operators 7 1,400.00 117.6
8 production foreman 1 3,000.00 36.0
9 Clerk 1 800.00 9.6
10 Cashier 1 1,000.00 12.0
11 Assistant operator 5 700.00 42.0
12 Quality supervisor 2 1,600.00 38.4
13 store keeper 1 1,400.00 16.8
14 time keeper 1 1,200.00 14.4
15 Guards 3 700.00 25.2
Total 28 29,200.00 520.8
Employment benefits and
16 allowances 20% 5,840.00 104.2
Total Annual Labor Cost (Direct +Indirect) 624.96

VII. FINANCIAL ANALYSIS

The financial analysis of the acrylic fiber and yarn project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity & 70% loan
Tax holidays 3 years
Bank interest 10%
Discount cash flow 10%
Accounts receivable 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
 137-xvii

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 22.03
million (see Table 7.1). From the total investment cost the highest share (Birr 17.06 million or
77.45%) is accounted by fixed investment cost followed by initial working capital (Birr 2.87
million or 13.03%) and pre operation cost (Birr 2.10 million or 9.51%). From the total
investment cost Birr 8.83 million or 40.10% is required in foreign currency.

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 53.20 53.20 0.24
1.2 Building and civil work 5,000.00 5,000.00 22.70
1.3 Machinery and equipment 1,325.29 8,835.28 10,160.57 46.12
1.4 Vehicles 1,500.00 1,500.00 6.81
1.5 Office furniture and equipment 350.00 350.00 1.59
Sub total 8,228.49 8,835.28 17,063.77 77.45
2 Pre operating cost *
2.1 Pre operating cost 654.82 654.82 2.97
2.2 Interest during construction 1,441.29 1,441.29 6.54
Sub total 2,096.11 2,096.11 9.51
3 Working capital ** 2,871.24 2,871.24 13.03
Grand Total 13,195.84 8,835.28 22,031.12 100

* 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 4.18 million. However,
only the initial working capital of Birr 2.87 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).
 137-xviii

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 17.60 million (see Table
7.2). The cost of raw material account for 68.18% of the production cost. The other major
components of the production cost are depreciation, financial cost, direct labor, and cost of
marketing and distribution which account for 15.33%, 6.76%, 2.96%, and 1.99% respectively.
The remaining 4.78% 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 three)

Items Cost (000 Birr) %

Raw Material and Inputs 11,999 68.18
Utilities 233 1.32
Maintenance and repair 305 1.73
Labor direct 521 2.96
Labor overheads 104 0.59
Administration Costs 200 1.14
Land lease cost 0 0.00
Cost of marketing and 350 1.99
Total Operating Costs
distribution 13,712 77.91
Depreciation 2,698 15.33
Cost of Finance 1,189 6.76
Total Production Cost 17,599 100.00

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 4.96 million to Birr 5.51 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 53.61 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.
 137-xix

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 9,172,800
Variable Margin ratio (%)

Break Even Capacity utilization = Break even Sales Value X 100 = 31.06%
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.
 137-xx

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 32.96% 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 25.44 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 28 persons. The project will generate Birr 11.22 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 manufacturing, handicraft, and chemical sub sector and also generates
other income for the government.
 137-xxi

Appendix 7.A

FINANCIAL ANALYSES SUPPORTING TABLES

 137-21

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
2,099.8 2,399.8 2,699.7 2,999.7 2,999.7 2,999.7 2,999.7 2,999.7 2,999.7 2,999.7
Total inventory 3 0 8 5 5 5 5 5 5 5
1,031.3 1,142.6 1,144.0 1,144.0 1,144.0 1,144.0 1,144.0 1,144.0
Accounts receivable 808.62 919.97 2 7 9 9 9 9 9 9

Cash-in-hand 10.99 12.56 14.13 15.69 15.93 15.93 15.93 15.93 15.93 15.93
2,919.4 3,332.3 3,745.2 4,158.1 4,159.7 4,159.7 4,159.7 4,159.7 4,159.7 4,159.7
CURRENT ASSETS 3 2 2 1 7 7 7 7 7 7

Accounts payable 48.18 55.07 61.95 68.83 68.83 68.83 68.83 68.83 68.83 68.83
CURRENT
LIABILITIES 48.18 55.07 61.95 68.83 68.83 68.83 68.83 68.83 68.83 68.83
TOTAL WORKING 2,871.2 3,277.2 3,683.2 4,089.2 4,090.9 4,090.9 4,090.9 4,090.9 4,090.9 4,090.9
CAPITAL 4 6 7 8 4 4 4 4 4 4
 137-22
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 8,399 9,599 10,799 11,999 11,999 11,999 11,999 11,999 11,999 11,999

Utilities 163 186 210 233 233 233 233 233 233 233

Maintenance and repair 214 244 275 305 305 305 305 305 305 305

Labour direct 365 417 469 521 521 521 521 521 521 521

Labour overheads 73 83 94 104 104 104 104 104 104 104

Administration Costs 140 160 180 200 200 200 200 200 200 200

Land lease cost 0 0 0 0 17 17 17 17 17 17

Cost of marketing
and distribution 350 350 350 350 350 350 350 350 350 350

Total Operating Costs 9,703 11,040 12,376 13,712 13,729 13,729 13,729 13,729 13,729 13,729

Depreciation 2,698 2,698 2,698 2,698 2,698 235 235 235 235 235

Cost of Finance 0 1,585 1,387 1,189 991 793 595 396 198 0

Total Production Cost 12,401 15,323 16,461 17,599 17,418 14,757 14,559 14,360 14,162 13,964
 137-23
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
15,28 19,65 21,84 21,84 21,84 21,84 21,84 21,84
Sales revenue 8 6 0 0 0 0 0 0 21,840 21,840
10,69 12,02 13,36 13,36 13,36 13,36 13,36
Less variable costs 9,353 0 6 2 2 2 2 2 13,362 13,362

VARIABLE MARGIN 5,935 8,966 9,814 8,478 8,478 8,478 8,478 8,478 8,478 8,478
in % of sales revenue 38.82 45.62 44.94 38.82 38.82 38.82 38.82 38.82 38.82 38.82
Less fixed costs 3,048 3,048 3,048 3,048 3,065 602 602 602 602 602

OPERATIONAL MARGIN 2,887 5,918 6,766 5,430 5,413 7,876 7,876 7,876 7,876 7,876
in % of sales revenue 18.88 30.11 30.98 24.86 24.78 36.06 36.06 36.06 36.06 36.06
Financial costs 1,585 1,387 1,189 991 793 595 396 198 0
GROSS PROFIT 2,887 4,333 5,379 4,241 4,422 7,083 7,281 7,480 7,678 7,876
in % of sales revenue 18.88 22.04 24.63 19.42 20.25 32.43 33.34 34.25 35.15 36.06
Income (corporate) tax 0 0 0 0 0 2,125 2,184 2,244 2,303 2,363
NET PROFIT 2,887 4,333 5,379 4,241 4,422 4,958 5,097 5,236 5,374 5,513
in % of sales revenue 18.88 22.04 24.63 19.42 20.25 22.70 23.34 23.97 24.61 25.24
 137-24

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 17,719 19,649 19,663 21,847 21,840 21,840 21,840 21,840 21,840 21,840 21,840 8,585
Inflow funds 17,719 4,361 7 7 0 0 0 0 0 0 0 0
Inflow operation 0 15,288 19,656 21,840 21,840 21,840 21,840 21,840 21,840 21,840 21,840 0
Other income 0 0 0 0 0 0 0 0 0 0 0 8,585
TOTAL CASH
OUTFLOW 17,719 14,064 15,020 16,158 17,296 16,703 18,629 18,490 18,351 18,212 16,092 0
Increase in fixed assets 17,719 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 2,919 413 413 413 2 0 0 0 0 0 0
Operating costs 0 9,353 10,690 12,026 13,362 13,379 13,379 13,379 13,379 13,379 13,379 0
Marketing and
Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0
Income tax 0 0 0 0 0 0 2,125 2,184 2,244 2,303 2,363 0
Financial costs 0 1,441 1,585 1,387 1,189 991 793 595 396 198 0 0
Loan repayment 0 0 1,982 1,982 1,982 1,982 1,982 1,982 1,982 1,982 0 0
SURPLUS (DEFICIT) 0 5,585 4,643 5,689 4,544 5,137 3,211 3,350 3,489 3,628 5,748 8,585
CUMULATIVE CASH
BALANCE 0 5,585 10,228 15,917 20,461 25,598 28,809 32,159 35,648 39,276 45,024 53,610
 137-25

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 15,288 19,656 21,840 21,840 21,840 21,840 21,840 21,840 21,840 21,840 8,585
Inflow operation 0 15,288 19,656 21,840 21,840 21,840 21,840 21,840 21,840 21,840 21,840 0
Other income 0 0 0 0 0 0 0 0 0 0 0 8,585

TOTAL CASH OUTFLOW 20,590 10,109 11,446 12,782 13,714 13,729 15,854 15,914 15,973 16,032 16,092 0
Increase in fixed assets 17,719 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 2,871 406 406 406 2 0 0 0 0 0 0 0
Operating costs 0 9,353 10,690 12,026 13,362 13,379 13,379 13,379 13,379 13,379 13,379 0

Marketing and Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0
Income (corporate) tax 0 0 0 0 0 2,125 2,184 2,244 2,303 2,363 0

NET CASH FLOW -20,590 5,179 8,210 9,058 8,126 8,111 5,986 5,926 5,867 5,808 5,748 8,585
- 56,01
CUMULATIVE NET CASH FLOW -20,590 15,411 -7,201 1,857 9,984 18,095 24,081 30,007 35,874 41,682 47,430 5
Net present value -20,590 4,708 6,785 6,806 5,550 5,036 3,379 3,041 2,737 2,463 2,216 3,310
- 25,44
Cumulative net present value -20,590 15,882 -9,097 -2,291 3,259 8,296 11,675 14,716 17,453 19,916 22,132 2

NET PRESENT VALUE 25,442

INTERNAL RATE OF RETURN 32.96%
 137-26
NORMAL PAYBACK 3 years