72.

PROFILE ON WATER FILTER CANDLES

 72-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 72-3

II. PRODUCT DESCRIPTION & APPLICATION 72-4

III. MARKET STUDY AND PLANT CAPACITY 72-4

A. MARKET STUDY 72-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 72-9

IV. MATERIALS AND INPUTS 72-10

A. RAW MATERIALS 72-10
B. UTILITIES 72-11

V. TECHNOLOGY & ENGINEERING 72-11

A. TECHNOLOGY 72-11
B. ENGINEERING 72-12

VI. MANPOWER & TRAINING REQUIREMENT 72-16

A. MANPOWER REQUIREMENT 72-16
B. TRAINING REQUIREMENT 72-17

VII. FINANCIAL ANLYSIS 72-17

A. TOTAL INITIAL INVESTMENT COST 72-18
B. PRODUCTION COST 72-18
C. FINANCIAL EVALUATION 72-19
D. ECONOMIC BENEFITS 72-21

I. SUMMARY

This profile envisages the establishment of a plant for the production of water filter
candles with a capacity of 25,000 pieces per annum. Water filter candles are used to filter
turbid water from ponds, lakes, rivers, etc. and hence play a crucial role in the provision
of safe drinking water in rural areas.
 72-3

The major raw materials needed for the production of water filter candles are china clay,
ball clay, feldspar, quartz, limestone, bactericide as well as ash, saw dust and other
organic materials like starch. Bactericide and ball clay have to be imported.

The demand for these products is directly related with projects for the provision of clean
drinking water at household level. The present demand for the proposed product is
estimated at 20,158 pieces per annum. The demand is expected to reach at 35,132 pieces
by the year 2018.

The total investment requirement is estimated at about Birr 4.72 million, out of which
Birr 2.05 million is required for plant and machinery. The plant will create employment
opportunities for 16 persons.

The project is financially viable with an internal rate of return (IRR) of 25.38 % and a net
present value (NPV) of Birr 3.23 million discounted at 8.5%.

The project has backward linkages with the mining industry. The establishment of such
factory will have a foreign exchange saving effect to the country by substituting the
current imports.
 72-4

II. PRODUCT DESCRIPTION AND APPLICATION

Raw water contains suspended impurities and pathogenic bacteria, which are responsible
for water borne diseases, like cholera, typhoid, jaundice, etc. These contaminants have to
be removed to make the water safe for drinking purpose. One of the well-known methods
is to filter water through beds sand, gravel and charcoal to remove the suspended
impurities, followed by boiling to kill the bacteria. This process, though efficient, is
costly and time consuming. To simplify the treatment of water, an inexpensive domestic
water filter candle has been developed.

Water filter candles may be made from ceramics or silica sand in the shape of thick
candles and are used to filter turbid water from lakes, rivers and even tap water, rendering
it hygienically potable. It is an appliance mounted at the center of upper container where
the turbid water is to be filled. Filtered water oozes through the filter candles into the
lower chamber from where clean, potable water is collected.

II. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Water filter candles are not made locally. The import statistics does not provide with even
the probable import estimate of these products for two main reasons;

 The bulk of the water filter candles are imported into the country while mounted
onto water containers for household use. All imported water containers of
stainless steel or aluminum may or may not have been designed to enable
mounting of filter candles. It is very difficult and also misguiding to attempt
haphazardly estimating import quantity of water filter candles, arising from the
quantity of import of such water containers for household use.
 72-5

 Although the Customs Authority maintains record of import of “water filter

candles for purification of water” made of ceramics, it does not, however,
differentiate between water filter candles for industrial and house hold use.

Table 3.1 below may shade some light regarding the foregoing suppositions.

Table 3.1
IMPORT OF FILTER OF CERAMICS FOR WATER PURIFICATION

Year Qty(No) Value(Birr)

2003 113 3,746

2004 3,161 233,451
2005 648 10,756
2006 1,716 113,676
Total 5,638 361,629

Source: Ethiopian customs Authority: Annual External Trade statistics; unpublished

Given the erratic nature and quantity of the imports on the one hand, and the current local
market price of a piece of double-chamber stainless steel water container mounted with
water filter candles range from Birr 450-600, (depending on the volume capacity) on the
other, one can infer that these imports are for replacement purposes, since the filter candles
are bound to get clogged after a prolonged usage.

The import figure on the water purification machinery may be an indication on the extent of
domestic demand for water filter candles. Present supply of not mounted water filter candles
is set as the average import of the four years of import, which is 1,410 pieces.

To asses demand for water filter candles, the end use method is considered here the most
palpable approach; because
o its manufacture locally has an import substitution impact and
 72-6

o it is an appliance or fixture to household potable water containers(the small

candles) and a fixture in machinery or apparatus for purification of water.

In the absence of local manufacture of water purification machinery and apparatus, water
filter candles may serve as replacement parts for worn and overused filters originally
mounted onto the apparatus.

Importation of such replacement parts as shown in Table 3.1 above will be significantly
reduced subsequent to the local manufacture of water filter candles.

The import statistics on the import of water purification apparatus and machinery presented
in Table 3.2 below gives an insight into the perceived and /or actual domestic demand for
water filter candles:

Table 3.2
IMPORT OF MACHINERY AND APPARATUS FOR WATER PURIFICATION
(IN NO)

Year Quantity Value(Birr)

2003 156,904 17,958,378
2004 38,355 2,748,370
2005 60,612 13,170,459
2006 89,215 13,254,887
Total 345,086 47,132,094
Average 86,271 11,782,024

Source: Ethiopia custom Authority, External trade statistics; unpublished

Experience using cylindrical two chamber water filtering containers of five to six liter
capacity, mounted with ceramics or silica sand water filter candles, has shown that average
usability of filter candles with good seepage capability is five years, after which trickling of
water to the lower chamber through the filters will be reduced to mere drops.
 72-7

The usability of filter candles for large scale apparatus is an average of three years. The
duration of usability is even less where turbidity is higher and the water murkier.

Assuming an average life expectancy of four years before filter candles are cast out
requiring replacement, current demand is computed at 21,568 sticks of water filter candles
of assorted sizes.

At 25% replacement of average import of water purification machinery from 2003-2006,

current demand-supply gap for water filter candles is computed to be 20,158 sticks.

2. Projected Demand

Future availability of local manufactured water filter candles may have a trigger effect in
initiating the local manufacture of filter mounted water containers for household use. In the
absence of any knowledge to this end, the above supposition is disregarded in computing the
forecast for future demand for water filter candles. Future demand is treated here only as an
import substituting replacement part in water purification.

Secondly, since the import statistics lumps together the apparatus for household and
industrial use, it has been impossible to identify trends for either item.

However, given the growth in income and the desire and increased awareness among the
public about the health benefits of drinking cleaner water, future demand for water filter
candles is assumed to increase by 5% every year from the present level.(See Table 3.3)
 72-8

Table 3.3
DEMAND FORECAST FOR WATER FILTER CANDLES (PIECES)

Year Projected
Demand
2009 22,646
2010 23,779
2011 24,968
2012 26,216
2013 27,527
2014 28,903
2015 30,398
2016 31,865
2017 33,459
2018 35,132

3. Pricing and Distribution

Average import value of a unit of water filter candle is Birr 64.15 apiece, CIF. A local
manufacturer is recommended to sell his water filter candle products, which are expected to
be similar in quality to their imported competitors at a price 30% over and above the CIF
value of the imports. A minimum average selling price of Birr 83.39 per piece is
recommended.

At the initial phases of the realization of products, distribution can be effected through
whole sellers of household utensils and kitchenware.

If and when manufacturing of the cylindrical water containers start to be produced locally, a
water filter candles project can also sell direct to the producers of water filter purifiers as
components.
 72-9

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

According to the market study, the demand of water filter candles, in number, in year
2009 will be 22,646 whereas this demand will grow to 35,132 by the year 2018. Taking in
to account the demand projected, construction period and full capacity attainment period,
and the economies of scale of production, the envisaged plant will have a capacity of
25,000 pieces per annum (8 hours /day and 300 working days per year).

2. Production Programme

The envisaged plant is anticipated to operate at 70% and 80% of installed capacity in the
first and second year, respectively. Full capacity production is expected to be achieved in
the third year and then after. The low production level at the initial stage is planned to
develop substantial market outlets for the product and to build up skill in operating and
maintaining the new machineries. The production programme for the envisaged plant is
shown in Table 3.3.

Table 3.3
PRODUCTION PROGRAMME

Sr. Product Production Programme

No. 1 2 3-10
1 Water filter candle(pieces) 17,500 20,000 25,000
3 Capacity utilization rate (%) 70 80 100

IV. MATERIAL AND INPUTS

 72-10

A. RAW MATERIALS

The major raw materials required are China clay, ball clay, feldspar, quartz, limestone,
bactericide as well as ash, saw dust and other organic materials such as starch. Most of
the raw materials for the production of water filter candelas are available locally. China
clay and lime stone will be obtained from Mugher, quartz and feldspar from Kenticha in
SNNPRS, saw dust from wood products manufacturers operating in the city. Ball clay
and bactericidal will be imported.

The annual raw material requirement is calculated on the bases of the final output. Thus,
the total cost of materials at full operation capacity of the plant is estimated to be Birr
115,120. Detail of raw material requirement and their cost is indicated in Table 4.1 below.
Table 4.1
RAW MATERIAL REQUIREMENT AND THEIR COSTS

Sr. Item Description Unit of Quantity L.C F.C T.C

No. Meas.

1 China clay Kg 32,000 78,400 - 78,400

2 Plastic ball clay Kg 29,200 3285 18,615 21,900
3 Quartz “ 7,600 6,080 - 6,080
4 Feldspar “ 5,200 3,640 - 3,640
5 Lime stone “ 3,200 1,600 - 1,600
6 Bactericide “ 100 375
2,125 2,500
7 Ash, saw dust and other “ 5000 1,000
organic materials - 1,000
Total 94,380 20,740 115,120

B. UTILITIES

The major utilities of the project are electricity, furnace oil and water. Annual
requirement and cost of utilities is indicated in Table 4.2.The total annual cost of utilities
is estimated at Birr 45,745.
 72-11

Table 4.2
UTILITIES REQUIREMENT AND COST

Sr. Description UOM Qty. Cost

No (‘000 birr)
1 Electricity KWh 50,000 23,680
2 Furnace oil Lt. 3,500 20,440
2 Water m3 500 1,625
Total 45,745

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

The process for the production of water filter candles consists of grinding the non-plastic
materials (China clay, ball clay, quartz, feldspar, etc.), mixing with organic materials and
casting the candles in moulds of desired shapes. The candles are sun -dried and then fired
at temperature of 950 to 1100ºc in furnace. After the candles are fired to the desired stage,
are taken out and air-cooled. After each candles are treated with bactericides final
inspection is made, packed and ready for dispatch.

The liquid waste containing different minerals will be collected in a containment vessel
made from concrete. After evaporation of the water the remaining solid staff will be
collected and land filled in selected area for the purpose. The construction cost of such
concrete containment vessel is estimated at Birr 50,000.

2. Source of Technology
 72-12

The machinery required for the envisaged plant could be obtained from the following
Indian companies;
1. M/s Amic Industries (P) Ltd
86-D, Dr. Suresh Sarkar Road,
Calcutta-700014

2. M/s D.P. Pulveriser Works,

12, Nagindas Master Road Extn.
Opp. Maharashtra Co-op. Apex Bank Ltd.
Fort, Bombay-400023
.

B. ENGINEERING

1. Machinery and Equipment

Table 5.1 shows the list of machinery and equipment required by the envisaged plant. The
total cost of machinery and equipment is estimated at Birr 2 million, of which Birr 1.7
million is required in foreign currency.

Table 5.1
LIST OF MACHINERY AND EQUIPMENT

Sr. Description Qty. Cost(Birr)

LC FC TC
No.
1 Ball mill 1
9,0000 510,000 600,000
 72-13

2 Crusher 1 36,000 204,000 240,000

3 SS Mixing tank(Assorted) 1 set 30,000 170,000 200,000
4 Moulds (Assorted) 1 set 15,000 85,000 100,000
5 Oil fired furnace 1 105,000 595,000 700,000
6 Heater 1 24,000 136,000 160,000
Total 300,000 1,700,000 2,000,000

2. Land, Building and Civil Works

The plant requires a total of 500 m2 area of land out of which 300 m2 is built-up area
which includes Processing area, raw material stock area, offices etc. 230m 2 are will be
covered by building with under ground floor which will accommodate the store and
production facility. The remaining 70m2 area will be used for office. Assuming
construction rate of Birr 2,300 per m2, the total cost of construction is estimated to be Birr
690,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) 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.
 72-14

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
blow 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 m 2 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.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile, which is a manufacturing project a land lease rate of Birr 346 per m2 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 5.2 shows incentives for lease payment.
 72-15

Table 5.2
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 period of lease for
industry is 60 years .

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 10.38 million of which 10% or Birr 1,038,000 will be paid in advance.
The remaining Birr 9.34 million will be paid in equal installments with in 28 years i.e.
Birr 333,643 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The envisaged plant will create job opportunities for about 16 workers. The total annual
cost of manpower is estimated at Birr 181,500. The detail is indicated in Table 6.1.
 72-16

Table 6.1
MANPOWER REQUIREMENT AND ANNUAL LABOUR COST (BIRR)

Sr. Description Req. Monthly Annual

No. No. Salary Salary
1 Manager 1 3,000 36,000
2 Accountant 1 1,200 14,400
3 Secretary 1 900 10,800
4 Salesperson/purchaser 1 1,200 14,400
5 supervisor 1 900 10,800
6 Driver 2 1,000 12,000
7 Skilled technician 3 1,800
operators 21,600
8 Unskilled workers 3 1,050 12,600
9 Guard 3 1,050 12,600
Total 16 145,200
Benefits (25% of basic
salary) 36,300
Grand total 16 181,500

B. TRAINING REQUIREMENT

Imparting skill for the skilled and unskilled workers who will be directly involved in the
water filter candles production is an essential task. Thus, on-job-training by the
machinery supplier for about two weeks should be given locally. The training cost is
estimated to be Birr 50,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the water filter candles project is based on the data presented in
the previous chapters and the following assumptions:-

Construction period 1 year

 72-17

Source of finance 30 % equity

70 % loan
Tax holidays 2 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
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
4.72 million, of which 36 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 1,038.00 - 1,038.00
2 Building and Civil Work 690.00 - 690.00
 72-18

3 Plant Machinery and Equipment 350.00 1,700.00 2,050.00

4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 376.5 - 376.50
7 Working Capital 24.09 - 24.09
Total Investment cost 3,028.59 1,700.00 4,728.59

* N.B Pre-production expenditure includes interest during construction ( Birr 226.50

thousand ), training ( Birr 50 thousand) and Birr 100 thousand costs of
registration, licensing and formation of the company including legal fees,
commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 1.03 million
(see Table 7.2). The major components of the production cost are depreciation, financial
cost and raw material cost which account for 35.29%, 17.49% and 11.14% respectively.
The remaining 36.07% is the share of direct labour, utility, repair and maintenance,
labour overhead and other administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
115.12 11.14
Utilities 45.74 4.43
Maintenance and repair
100.00 9.68
Labour direct 108.90 10.54
Labour overheads
45.38 4.39
Administration Costs 72.60 7.03
Land lease cost
- -
 72-19

Total Operating Costs 487.74 47.22

Depreciation 364.50 35.29
Cost of Finance 180.70 17.49
Total Production Cost
1,032.94 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 512.48 thousand to
Birr 1.02 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 8.87 million.

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
 72-20

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 of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 23 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover 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 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 porject is computed to be 25.38 %
indicating the vaiability of the project.

6. Net Present Value

 72-21

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
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 3.23 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 16 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.07 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 has backward linkages with the mining
industry