142.

PROFILE ON THE PRODUCTION OF SEWING

THREAD
 142-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 142-2

II. PRODUCT DESCRIPTION & APPLICATION 142-፣

III. MARKET STUDY AND PLANT CAPACITY 142-3

A. MARKET STUDY 142-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 142-6

IV. MATERIALS AND INPUTS 142-7

A. RAW & AUXILIARY MATERIALS 142-7
B. UTILITIES 142-8

V. TECHNOLOGY & ENGINEERING 142-8

A. TECHNOLOGY 142-8
B. ENGINEERING 142-9

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 142-13

A. HUMAN RESOURCE REQUIREMENT 142-13
B. TRAINING REQUIREMENT 142-14

VII. FINANCIAL ANLYSIS 142-15

A. TOTAL INITIAL INVESTMENT COST 142-15
B. PRODUCTION COST 142-16
C. FINANCIAL EVALUATION 142-17
D. ECONOMIC AND SOCIAL BENEFITS 142-19
 142-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of sewing thread with a
capacity of 295 tons per annum. Sewing thread is used as an input in shoe industry, knit wear
factories, furniture and upholstery, blanket manufacturing for ribbon sewing and rural household
for needle sewing and mending clothes.

The demand for sewing thread s is met through domestic production and imports. The present
(2012) unsatisfied demand for sewing thread is estimated at 1,438 tones. The unsatisfied demand
for sewing thread is projected to reach 2,534 tons and 4,370 by the year 2017 and 2022,
respectively.

The principal raw materials required are yarn, dyestuffs, and chemicals. Cotton yarn can be
obtained locally from textile factories while dyestuff and chemicals have to be imported.

The total investment cost of the project including working capital is estimated at Birr 16.46
million. From the total investment cost, the highest share (Birr 11.21 million or 68.07%) is
accounted by fixed investment cost followed by initial working capital (Birr 3.44 million or
20.92%) and pre operation cost (Birr 1.81 million or 11.00%). From the total investment cost,
Birr 4.62 million or 28.05% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 31.61% and a net present
value (NPV) of Birr 18.78 million, discounted at 10%.

The project can create employment for 22 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 backward linkage with textile manufacturing sub sector and forward linkage with
the garment, blanket, and a leather article sub sectors and also generates income for the
Government in terms of tax revenue and payroll tax.

II. PRODUCT DESCRIPTION AND APPLICATION

Sewing cotton thread is a tightly twisted thread of two or more ply that is circular when cut in
cross section. It is used for industrial sewing, hand sewing and in home sewing machines.
 142-iv

Ninety-five percent of all sewing thread that is manufactured is used in commercial and
industrial sewing.

Industrial sewing thread is used as an input in shoe industry, knit wear factories, furniture and
upholstery, blanket manufacturing for ribbon sewing and rural household for needle sewing and
mending clothes.

Threads are wound on spools or large cones-that are marked on their ends with the size or
fineness of the thread. Cotton sewing thread for hand work and machines (both home and
commercial machines) has to be smooth and friction-free. Cotton thread is available in a wide
range of weights, and is suitable for most sewing projects. 40wt and 50wt are the most common,
but cotton threads range from 8wt to 100wt. It should be easy to thread through needles, and it
should move easily when tension is applied to it. Strength to hold stitches when garments are
being worn and during laundering is a requirement, as is elasticity during stitching and wear.

Cotton thread does not stretch a great deal, and will break if pulled too tightly. Cotton threads
will fade with the sun, and shrink in the wash, so treat them as you would cotton fabrics. Most
cotton threads sold now are mercerized. This is a chemical and heat process that increases the
luster of the thread. During the mercerizing process, fuzzy threads are burned off, creating a
smoother surface. This smooth surface reflects light, increasing the luster of the thread. It also
has the effect of increasing water absorbency, making the thread easier to dye.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Present Supply and Demand

The country's requirement of cotton sewing thread is met through domestic production, and
imports. Customs data reveals that there has also been export of sewing thread. Exports, on the
average accounted for about 3% of domestic production, while imports accounted for about 54%
total domestic supply of sewing thread during the period 2000-2011. The total domestic supply
of sewing thread, i.e. import and domestic production net of exports, during 2000 - 2011 is
presented in Table 3.1.
 142-v

Table 3.1
TOTAL SUPPLY OF COTTON SEWING THREAD (KG)
Year Import1 Domestic Export1 Total
Production2 Supply
2000 307,410 24,000 23,430 307,980
2001 518,583 7,000 ----- 525,583
2002 293,738 20,000 ----- 313,738
2003 803,141 1,000 30 804,111
2004 478,918 37,000 100,000 415,918
2005 377,763 108,000 11,058 474,706
2006 228,861 25,000 300 253,561
2007 363,700 49,000 560 412,140
2008 792,012 2,119,000 42 2,910,970
2009 510,441 671,000 250 1,181,191
2010 866,819 1,346,000 33,758 2,179,061
2011 948,838 1,378,866* 11,445 2,316,060

*Data for domestic production of year 2011is not published. Hence, average of year 2008--2010
is assumed to be the production of year 2011.
Source: - 1. Ethiopian Revenues & Customs Authority
2. CSA, Report on Large and Medium Scale Manufacturing Industries

Imports, domestic production, export and total apparent domestic consumption of the product
averaged at 541tones, 482 tones 15 tones and 1,007,918 kg, respectively. Apparently, imports
accounted for about 54% total domestic supply of sewing thread.

The data depicted in Table 3.1 shows a general increasing trend although it is characterized by
some fluctuations. The apparent consumption of sewing thread (domestic production plus import
minus export) has been increasing from period to a period. During the period 2000--2002, the
 142-vi

yearly average apparent consumption was about 382.4 tons. The domestic apparent consumption
increased to a yearly average of 472.1 tons during the period 2003--2007. Compared to the
previous three years average it is higher by about 24%. A huge increase on the apparent
consumption is registered during the recent four years i.e. 2008--20011. During this period the
yearly average consumption has reached to a level of 2,090 tones, which is 4.4 fold compared to
the yearly average of the previous five years i.e. 2003---2007.

In order to estimate the current effective domestic demand for the product a15% annual growth
rate, which is much below the observed trend in the past, is applied by taking year 2011 as a
base. Accordingly, current domestic effective demand for sewing thread is estimated at 2,663
tones. Assuming 54% of the demand was satisfied by import the current unsatisfied demand for
sewing thread is 1,438 tones. It should be noted that sewing thread has also an export market
potential, in addition to the domestic demand.

2. Projected Demand

The future demand for sewing thread is a function of growth of the user industries, mainly
apparel and garment manufacturing industries. Given the recent 10.6% rate of growth of the
industrial sector (where the share of the textile industries is quite substantial) and the due
attention given by the government for the textile industry, 8% annual rate of growth is assumed
to project the demand for cotton sewing thread in Ethiopia. The total projected demand, domestic
production and the unsatisfied demand is shown in Table 3.2.
 142-vii

Table 3.2 Total Projected Domestic Unsatisfied

Year Demand Production Demand

DEMAND 2013 2,876 1,379 1,497 PROJECTION

OF COTTON 2014 3,106 1,379 1,727 SEWING
THREAD 2015 3,355 1,379 1,976 (TONS)
2016 3,623 1,379 2,244
2017 3,913 1,379 2,534
2018 4,226 1,379 2,847
2019 4,564 1,379 3,185
2020 4,929 1,379 3,550
2021 5,323 1,379 3,944
2022 5,749 1,379 4,370

The unsatisfied demand will increase from 1,497 tones in the year 2013 to 2,534 tones and 4,370
tones by the year 2017 and year 2022, respectively.

3. Pricing and Distribution

Based on the recent import data obtained from Customs Authority and considering import related
expenses a factory gate price of Birr 82.7 per kg is recommended. The product will find its
market outlet through the existing yarn and thread wholesale and retail channels.

B. PLANT CAPACITY AND PRODUCTION PROGRAM

 142-viii

1. Plant Capacity

According to the market presented above, the unsatisfied demand for cotton sewing thread is
1497 tons in 2013 and grows to 4,370 tons by the year 2022. The envisaged plant will have a
production capacity of 295 tons cotton sewing thread per year on a single shift basis. Production
can be doubled or tripled either by increasing the number of shifts or by expanding the factory.

2. Production Program

The plant is expected to operate in a shift 8 hours a day for a total of 300 days a year. It is
anticipated that the plant will run at 75% of its capacity during the first year, at 85% in the
second year and at full capacity in the third year and then after. Production build up is made to
start at reduced capacity during the initial period in order to develop substantial market outlets
for the products.
Table 3.3
PRODUCTION PROGRAM

Year 1 2 3 and above

Capacity utilization (%) 75 85 100
Total Production (ton) 221 251 295

IV. RAW MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The main raw material inputs for the production of cotton sewing threads are yarn, dyestuffs, and
chemicals. Cotton yarn can be obtained locally from textile factories while dyestuff and
chemicals have to be imported.

The estimated annual requirement and cost of raw material and auxiliaries inputs at a100%
capacity utilization is given in Table 4.1.
 142-ix

Table 4.1
ANNUAL COST OF RAW & AUXILIARY MATERIAL INPUTS (TONS)

Cost ('000 Birr)

Sr. No. Description Qty. FC LC TC
1 Cotton yarn 337.6 - 12455.1 12455.1
2 Dye stuff 16.2 181.0 43.6 224.7
3 Chemicals 4.0 218.6 52.7 271.3
Cons &
4 bobbins 1.3 221.6 - 221.6
Total - 621.2 12551.4 13172.6

B. UTILITIES

The major utilities required by the plant are electricity, water and fuel. The estimated annual
requirement at 100% capacity utilization rate and the estimated costs are given in Table 4.2.

Table 4.2
ANNUAL UTILITY REQUIREMENT AND ESTIMATED COST

Sr. Cost ('000

No. Description Qty. Birr)
1 Electric power, kWh 665,000 385.70
2 Fuel oil, liters 20,397 295.76
3 Water, m3 10,186 101.86
Total - 783.32
 142-x

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

The basic operations involved in the manufacture of cotton sewing thread are cleaned, combed
and sorted cotton is fed through a series of rollers in a process called drawing that generates a
narrow band of cotton fiber. The fiber is slightly twisted to form roving and the roving is drawn
and twisted again. It is spun to form a single thread that is wound and twisted with others to form
the threads. Cotton sewing threads is singed over an open flame and mercerized by immersion in
caustic soda. This process is strengthens the thread and give it a lustrous finish. The treated
cotton sewing thread is wound or bobbins or cones.

After manufacture, the thread is dyed. Dye is mixed in large vats; several hundred colors can be
produced and dye mixing is controlled by computer. Finally the dyed thread is wound on smaller
spools for industrial or home use, and the spool care packed into boxes for market.

2. Environmental Impact Assessment

The envisage operation uses different chemicals like caustic soda and different pigments for the
operation. Such operation creates an adverse effect to the environment if no proper mitigation
means is considered during the design stage of the operation and hence, the right treatment
means will be considered and put in place. Hence, an investment cost of Birr 500,000 is allotted
for environmental impact mitigation.

B. ENGINEERING

1. Machinery and Equipment

The production equipment required by the plant and their estimated costs are given in Table
5.1.All the machinery and equipment have to be imported.
 142-xi

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND ESTIMATED COSTS

Sr. Cost ('000 Birr)

Description Qty.
No. FC LC TC
1 Winding Machine 2 469 - 469
2 Twisting Machine 2 665 - 665
3 Reeling Machine 1 560 - 560
4 Doubling Machine 1 525 - 525
5 Dying 1 453.6 - 453.6
6 Squeezing Machine 1 203 - 203
7 Drying Machine 1 189 - 189
8 Mercerizering 1 315 - 315
9 Sizing 1 168 - 168
10 Compressor 1 490 - 490
11 Auto-process control 1 371 - 371
12 Lab-Equipment 1 210 - 210
Total 4,618.60 - 4,618.60
Insurance, Bank, Customs 1072.18 1072.18
Grand Total 4,618.60 1072.18 5,690.78

2. Land, Building and Civil Works

 142-xii

The total area of land is estimated to be 2,500 m 2, out of which 700 m2 will be a built-up area.
The cost of building and civil works at the rate of Birr 5,000 per m 2 is estimated at Birr
3,500,000.

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
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
 142-xiii

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
1st 1686
2nd 1535
Central Market
District 3rd 1323
4th 1085
5th 894
Transitional zone 1st 1035
2nd 935
3rd 809
 142-xiv

Floor
Zone Level Price/m2
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%
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.
 142-xv

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 665,000 of
which 10% or Birr 66,500 will be paid in advance. The remaining Birr 598,500 will be paid in
equal installments with in 28 years i.e. Birr 21,375 annually.

VI. HUMANRESOURCE & TRAINING REQUIREMENT

A. HUMANRESOURCE REQUIREMENT

The total human resource requirement of the plant is 22 persons. Details of human resource and
estimated annual labor cost including fringe benefits are indicated in Table 6.1.

Table 6.1
HUMAN RESOURCE REQUIREMENT AND LABOR COST
Sr. No. Salary (Birr)
Description
No. Required Monthly Annual
1 Manager 1 5,000 60,000
2 Secretary 1 1600 19,200
3 Production Head (Supervisor) 1 3,500 42,000
4 Finance and Administration Head 1 3,500 42,000
5 Salesman 1 2,500 30,000
6 Store Keeper 1 1,600 19,200
7 Purchaser 1 2,000 24,000
8 Mechanic 1 2,400 28,800
9 Electrician 1 2,400 28,800
10 Accountant/Cashier 1 1,800 21,600
11 Driver 1 1,000 12,000
12 Production 15 24,000 288,000
13 Laborer 10 8,000 96,000
 142-xvi

Sr. No. Salary (Birr)

Description
No. Required Monthly Annual
11 Guard 3 2,400 28,800
Total 39 61,700 740,400
Employee's Benefit (20% Of Basic Salary) - - 148,080
Grand Total - - 888,480

B. TRAINING REQUIREMENT

The production supervisor should be given a three weeks on-the-job training by skilled
technician of the equipment supplier. The cost of training is estimated at Birr 150,000.-

VII. FINANCIAL ANALYSIS

The financial analysis of the sewing thread 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 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
 142-xvii

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 16.46
million (see Table 7.1). From the total investment cost, the highest share (Birr 11.21 million or
68.07%) is accounted by fixed investment cost followed by initial working capital (Birr 3.44
million or 20.92%) and pre operation cost (Birr 1.81 million or 11.00%). From the total
investment cost, Birr 4.62 million or 28.05% 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 66.50 66.50 0.40
1.2 Building and civil work 3,500.00 3,500.00 21.26
1.3 Machinery and equipment 1,072.18 4,618.60 5,690.78 34.57
1.4 Vehicles 1,500.00 1,500.00 9.11
1.5 Office furniture and equipment 450.00 450.00 2.73
Sub total 6,588.68 4,618.60 11,207.28 68.07
2 Pre operating cost *
2.1 Pre operating cost 734.54 734.54 4.46
2.2 Interest during construction 1,077.03 1,077.03 6.54
Sub total 1,811.57 1,811.57 11.00
3 Working capital ** 3,444.39 3,444.39 20.92
Grand Total 11,844.64 4,618.60 16,463.24 100

* N.B Pre operating cost include project implementation cost such as installation, startup,
commissioning, project engineering, project management etc and capitalized interest during
construction.
 142-xviii

** The total working capital required at full capacity operation is Birr 4.69 million. However,
only the initial working capital of Birr 3.44 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 18.94 million (see Table
7.2). The cost of raw material account for 69.57% of the production cost. The other major
components of the production cost are utility, depreciation, financial cost, Labor direct,
marketing and distribution which account for 4.14, 9.35%, 3.91%, and 3.96% respectively. The
remaining 9.07% is the share of, labor overhead and administration cost and repair and
maintenance. 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
13,173 69.57
Utilities
783 4.14
Maintenance and repair
285 1.51
Labor direct
740 3.91
Labor overheads
148 0.78
Administration Costs
250 1.32
Land lease cost
0 0.00
Cost of marketing and distribution
750 3.96
Total Operating Costs
16,129 85.18
Depreciation
1,770 9.35
Cost of Finance
1,037 5.47
Total Production Cost
18,936 100.00
 142-xix

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 2.77 million to Birr 4.48 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
flow amounts to Birr 41.00 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 9,552,060
Variable Margin ratio (%)
Break Even Capacity utilization = Break even Sales Value X 100 = 34 %
Sales revenue
 142-xx

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

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 31.61% 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 18.78
million which is acceptable. For detail discounted cash flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

 142-xxi

The project can create employment for 22 persons. The project will generate Birr 11.58 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 shoe manufacturing, textile and furniture sub sectors and also generates other
income for the Government.

Appendix 7.A

FINANCIAL ANALYSES SUPPORTING TABLES

142-xxii
 142-21

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
2,469.9 2,799.2 3,293.2 3,293.2 3,293.2 3,293.2 3,293.2 3,293.2 3,293.2 3,293.2
Total inventory 4 6 5 5 5 5 5 5 5 5
1,023.6 1,151.8 1,344.0 1,344.0 1,345.8 1,345.8 1,345.8 1,345.8 1,345.8 1,345.8
Accounts receivable 9 5 8 8 6 6 6 6 6 6

Cash-in-hand 14.82 16.80 19.76 19.76 20.06 20.06 20.06 20.06 20.06 20.06
3,508.4 3,967.9 4,657.1 4,657.1 4,659.1 4,659.1 4,659.1 4,659.1 4,659.1 4,659.1
CURRENT ASSETS 5 1 0 0 7 7 7 7 7 7

Accounts payable 64.06 72.60 85.42 85.42 85.42 85.42 85.42 85.42 85.42 85.42
CURRENT
LIABILITIES 64.06 72.60 85.42 85.42 85.42 85.42 85.42 85.42 85.42 85.42
TOTAL WORKING 3,444.3 3,895.3 4,571.6 4,571.6 4,573.7 4,573.7 4,573.7 4,573.7 4,573.7 4,573.7
CAPITAL 9 0 8 8 6 6 6 6 6 6
 142-22

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 9,880 11,197 13,173 13,173 13,173 13,173 13,173 13,173 13,173 13,173

Utilities 587 666 783 783 783 783 783 783 783 783

Maintenance and repair 214 242 285 285 285 285 285 285 285 285

Labour direct 555 629 740 740 740 740 740 740 740 740

Labour overheads 111 126 148 148 148 148 148 148 148 148

Administration Costs 188 213 250 250 250 250 250 250 250 250

Land lease cost 0 0 0 0 21 21 21 21 21 21

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

Total Operating Costs 12,284 13,822 16,129 16,129 16,150 16,150 16,150 16,150 16,150 16,150

Depreciation 1,770 1,770 1,770 1,770 1,770 185 185 185 185 185

Cost of Finance 0 1,185 1,037 889 740 592 444 296 148 0

Total Production Cost 14,054 16,777 18,936 18,788 18,661 16,928 16,780 16,632 16,483 16,335
 142-23

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
17,05 19,33 22,74 22,74 22,74 22,74 22,74 22,74
Sales revenue 7 1 3 3 3 3 3 3 22,743 22,743
11,53 13,07 15,37 15,37 15,37 15,37 15,37 15,37
Less variable costs 4 2 9 9 9 9 9 9 15,379 15,379

VARIABLE MARGIN 5,523 6,259 7,364 7,364 7,364 7,364 7,364 7,364 7,364 7,364
in % of sales revenue 32.38 32.38 32.38 32.38 32.38 32.38 32.38 32.38 32.38 32.38
Less fixed costs 2,520 2,520 2,520 2,520 2,541 956 956 956 956 956

OPERATIONAL MARGIN 3,003 3,739 4,844 4,844 4,823 6,408 6,408 6,408 6,408 6,408
in % of sales revenue 17.60 19.34 21.30 21.30 21.20 28.17 28.17 28.17 28.17 28.17
Financial costs 1,185 1,037 889 740 592 444 296 148 0
GROSS PROFIT 3,003 2,554 3,807 3,955 4,082 5,815 5,963 6,111 6,260 6,408
in % of sales revenue 17.60 13.21 16.74 17.39 17.95 25.57 26.22 26.87 27.52 28.17
Income (corporate) tax 0 0 0 1,187 1,225 1,745 1,789 1,833 1,878 1,922
NET PROFIT 3,003 2,554 3,807 2,769 2,857 4,071 4,174 4,278 4,382 4,485
in % of sales revenue 17.60 13.21 16.74 12.17 12.56 17.90 18.35 18.81 19.27 19.72
142-24
 142-24

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 11,942 21,642 19,340 22,756 22,743 22,743 22,743 22,743 22,743 22,743 22,743 7,817
Inflow funds 11,942 4,585 9 13 0 0 0 0 0 0 0 0
Inflow operation 0 17,057 19,331 22,743 22,743 22,743 22,743 22,743 22,743 22,743 22,743 0
Other income 0 0 0 0 0 0 0 0 0 0 0 7,817
TOTAL CASH
OUTFLOW 11,942 16,870 16,947 19,336 19,685 19,598 19,968 19,865 19,761 19,657 18,073 0
Increase in fixed assets 11,942 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 3,508 459 689 0 2 0 0 0 0 0 0
Operating costs 0 11,534 13,072 15,379 15,379 15,400 15,400 15,400 15,400 15,400 15,400 0
Marketing and
Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income tax 0 0 0 0 1,187 1,225 1,745 1,789 1,833 1,878 1,922 0
Financial costs 0 1,077 1,185 1,037 889 740 592 444 296 148 0 0
Loan repayment 0 0 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 0 0
SURPLUS (DEFICIT) 0 4,773 2,392 3,420 3,058 3,145 2,775 2,878 2,982 3,086 4,670 7,817
CUMULATIVE CASH
BALANCE 0 4,773 7,165 10,585 13,643 16,788 19,562 22,441 25,423 28,509 33,179 40,996
 142-25

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 17,057 19,331 22,743 22,743 22,743 22,743 22,743 22,743 22,743 22,743 7,817
Inflow operation 0 17,057 19,331 22,743 22,743 22,743 22,743 22,743 22,743 22,743 22,743 0
Other income 0 0 0 0 0 0 0 0 0 0 0 7,817

TOTAL CASH OUTFLOW 15,386 12,735 14,499 16,129 17,318 17,375 17,895 17,939 17,984 18,028 18,073 0
Increase in fixed assets 11,942 0 0 0 0 0 0 0 0 0 0 0
Increase in net working capital 3,444 451 676 0 2 0 0 0 0 0 0 0
Operating costs 0 11,534 13,072 15,379 15,379 15,400 15,400 15,400 15,400 15,400 15,400 0

Marketing and Distribution cost 0 750 750 750 750 750 750 750 750 750 750 0
Income (corporate) tax 0 0 0 1,187 1,225 1,745 1,789 1,833 1,878 1,922 0

NET CASH FLOW -15,386 4,322 4,832 6,614 5,425 5,368 4,848 4,804 4,759 4,715 4,670 7,817
- 42,78
CUMULATIVE NET CASH FLOW -15,386 11,064 -6,232 382 5,807 11,175 16,023 20,827 25,586 30,301 34,971 9
Net present value -15,386 3,929 3,994 4,969 3,706 3,333 2,737 2,465 2,220 2,000 1,801 3,014
- 18,78
Cumulative net present value -15,386 11,457 -7,463 -2,494 1,211 4,544 7,281 9,746 11,966 13,966 15,766 0

NET PRESENT VALUE 18,780

INTERNAL RATE OF RETURN 31.61%
NORMAL PAYBACK 3 years