Investment Office ANRS

Project Profile on the Establishment

of Leather and Footwear producing
plant

Development Studies
Associates (DSA)

October 2008
Addis Ababa
 Table of Contents

1. Executive Summary..................................................................................1
2. Product Description and Application....................................................1
3. Market Study, Plant Capacity and Production Program....................2
3.1 Market Study.......................................................................................................2
3.1.1 Present Demand and Supply........................................................................2
3.1.2 Projected Demand........................................................................................2
3.1.3 Pricing and Distribution...............................................................................3
3.2 Plant Capacity......................................................................................................3
3.3 Production Program.............................................................................................4
4. Raw Materials and Utilities....................................................................4
4.1 Availability and Source of Raw Materials...........................................................4
4.2 Annual Requirement and Cost of Raw Materials and Utilities...........................4
5 Location and Site.....................................................................................5
6 Technology and Engineering..................................................................5
6.1 Production Process...............................................................................................5
6.2 Machinery and Equipment...................................................................................5
6.3 Civil Engineering Cost........................................................................................6
7 Human Resource and Training Requirement......................................7
7.1 Human Resource..................................................................................................7
7.2 Training Requirement..........................................................................................7
8 Financial Analysis...................................................................................8
8.1 Underlying Assumption.......................................................................................8
8.2 Investment............................................................................................................9
8.3 Production Costs................................................................................................10
8.4 Financial evaluation...........................................................................................10
9 Economic and Social Benefit and Justification..................................11
ANNEXES....................................................................................................13
 1. Executive Summary
This project profile deals with the establishment of leather footwear producing plant in Amhara
National Regional State. The following presents the main findings of the study

Demand projection divulges that the domestic demand for leather footwear is substantial and is
increasing with time. Accordingly, the planned plant is set to produce 330,000 pairs of shoes
annually. The total investment cost of the project including working capital is estimated at Birr
11.3 million and creates 104 jobs and Birr 853,640 of income.

The financial result indicates that the project will generate profit beginning from the first year of
operation. Moreover, the project breaks even at 17.52% of capacity utilization and payback fully
the initial investment less working capital in second year of operation. The result further shows
that the calculated IRR of the project is 37.7%.

In addition to this, the proposed project possesses wide range of economic and social benefits
such as increasing the level of investment, tax revenue, employment creation and import
substitution.

Generally’ the project is technically feasible, financially and commercially viable as well as
socially and economically acceptable. Hence the project is worth implementing.

2. Product Description and Application

Bare human feet are protected from hazardous stone and dust by wearing man-made shoe.
Leather footwear is one kind of shoe that protects the feet.

Leather footwear is increasing popularity with rising income and increasing in awareness of its
superiority over plastic, rubber and canvas shoes. Leather shoe are produced mainly in Addis
Ababa and other towns and imported to the region. Basically leather footwear are produced by
small-scale private enterprises although substantial numbers of small-scale private producers of

1
footwear are currently operating in other parts of Ethiopia, only few in number are located in the
region. It is very essential to establish small-scale leather shoe manufacturing enterprises in the
region, which can employee many persons.

3. Market Study, Plant Capacity and Production Program

3.1 Market Study

3.1.1 Present Demand and Supply

There is a huge potential and existing demand for footwear in general and leather shoe in
particular for the large number of the population in the region due to the rise in income and
increase of population in urban towns. There is unsatisfied huge demand for leather shoe. The
manufacturing enterprises that produce durable footwear can capture this huge demand.

3.1.2 Projected Demand

Leather footwear is mainly demanded by urban population usually with relatively high income.
If we assume that at least 70 percent of the urban potential customers and 40 percent of the rural
customers, total potential customers will be about 3.5 million. If we further assume that 25% of
this population can will and able to buy the leather shoe the effective demand is equivalent to
875,000. This figure considers only age group above five years and above and annual growth rate
of 2% and this forecast is too skeptic and indicates the minimum expected demand of the region
in the coming ten year. This
untapped market Year Projected Demand for footwear will guarantee
the investor’s 2007/08 875,000
future
expansion. 2008/09 892,500
2009/10 910,350
Table 1: 2010/11 Projected
928,557
Demand of leather Shoes
2011/12 947,128
2012/13 966,071
2013/14 985,392
2014/15 1,005,100
2015/16 1,025,202
2
2016/17 1,045,706
2017/18 1,066,620
2018/19 1,087,953
 3.1.3 Pricing and Distribution

The market survey result indicates that the average retail price of Birr 100 and 60 for men and
women shoes respectively. Deducting 20% margin for retailer and 10% for wholesaler and by
taking the capacity of the envisaged plant in to account, the selling price of Birr 70 for men and
Birr 42 for women shoes has been estimated for the projection of the revenue of the plant. The
available retail and wholesale network shall be used by the envisaged plant to reach its customer.

3.2 Plant Capacity

Thus, given the expected demand for Leather Shoes presented earlier, and the planned
technology, the envisaged plant is set to produce 1200 pairs of men and women leather shoe per
day and 330,000 pairs of leather shoes annually.

3
 3.3 Production Program

The program is scheduled based on the consideration that the envisaged plant will work 275 days
in a year, where the remaining days will be holidays and for maintenance. During the first year of
operation the plant will operate at 85 percent capacity and then it grows to 100% percent in the
2nd year. This consideration is developed based on the assumption that market and logistics
barriers would take place for the first one years of operation.

4. Raw Materials and Utilities

4.1 Availability and Source of Raw Materials

The main raw material is leather, which is available from local tanneries. Other inputs like sole,
eyelet and threads are also available in the domestic market.

4.2 Annual Requirement and Cost of Raw Materials

and Utilities

The annual raw material and utility requirement and the associated cost for the envisaged plant is
listed in Table 2 here under

Table 2: Material and Utility Requirement

Total Cost ('000 Birr)

Material and Input Quantity L.C. F.C.
Leather 8308300
Eyelet 1789480
Sole 2556400
Thread 127820
Dying and other 100000
Total Material Cost 12,782,000
Utility 6000
Electricity 227,040
Furnace Oil 5000
Water 2,650
Total Utility Cost 240,690

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5 Location and Site
The appropriate locations for the envisaged project in view of the availability of input,
infrastructure as well as market for the output are in Bahir Dar and Dessie.

6 Technology and Engineering

6.1 Production Process

Leather shoe production involves (clicking) uppers of leather, sewing together the inner and
outer layers of the uppers, lasting (shaping) the upper and heels, and attaching to soles. All
operation can be performed manually or mechanically, depending on the materials in use.

The alternative technological option requires a production process that starts from the raw hides
and skins instead of obtaining semi finished hides and skins and translating it into finished
leather. In other words, the alternative approach requires setting up an integrated plant. But this
approach is not recommended for a number of reasons. First of all, the existing plants can easily
supply the small amount of semi finished leather required by the envisaged plant. In addition to
this, integrating the semi finishing and finishing plants require huge investment and hence large
sum of capital. Moreover, effluent control and environmental risks generally are significantly
reduced by the proposed production process since it is intended to acquire hides and skins that
have already been through primary stage tanning processes.

6.2 Machinery and Equipment

The main items of equipment required are as follows:
- Hydraulic clicking press
- Skiving machine
- Lasting machine
- Sole cutting and sole splitting machine
- Finishing machine
- Heat sealing machine
- Pneumatic sole attaching machine
- Stamping machine
- Compressor

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The, total cost of machinery and equipment including freight insurance and bank cost is
estimated to be about Birr 505,000.

Suppliers Addresses
Gabbar Engineering Company
Plot No.1903, Phase Ill, F-Road, G.I.D.C. Industrial Estate, Vatwa
Ahmedabad, Gujarat, India
Phone: +(91)-(79)-25830971/25891657
Fax: +(91)-(79)-25832000
Website: http://www.indiamart.com/gabbar-engineering

Ganpati Shoe Machinery

13/22,24, DDA Business Centre
New Delhi. India
Phone: +(91)-(11)-5511371
Fax: +(91)-(11)-5525065

E.H. Turel & Company

48, Clare Road Byculla
Mumbai, Maharashtra, India
Tel: 022-24129234, 24132292
Fax: 022-25004307

6.3 Civil Engineering Cost

The plant site will have an area of about 5000 m 2 while the plant building will cover a total area
of 3500 m2. The plant building will incorporate production hall, storage area (products and
chemicals), compounding unit, inspection unit, packing area, etc. and offices. Assuming that the
unit (per m2) cost of building will be Birr 2000, the total expenditure on plant building will be
Birr 7 million. The total expenditure on land will be Birr 3000,000 as per lease rate of ANRS.
Thus, the total cost of land, building and civil work will be Birr 3 million.

6
7 Human Resource and Training Requirement

7.1 Human Resource

The list of required human resource for the envisaged plant is stated in Table 3 below

Table 3: Human Resource Requirement

Monthly Total
No. Salary Annual Salary
Position Required (in Birr) (Birr)
General Manager 1 3500 42,000.00
Mechanical Engineer 1 2200 26,400.00
Personnel & Finance Head 1 2000 24,000.00
Accountant 2 1000 24,000.00
Secretary 1 850 10,200.00
Sales Clerck 5 700 42,000.00
Store Keeper 3 700 25,200.00
Mechanic and Electrician 3 750 27,000.00
Supervisor 3 1500 54,000.00
Operators 40 1000 480,000.00
Daily Laborers 6 400 28,800.00
Cleaners 5 300 18,000.00
Messengers 2 350 8,400.00
Driver 2 800 19,200.00
Guards 5 400 24,000.00
Total 853,200.00
Benefit (20%) 170,640.00
Total 104 1,023,840.00

The envisaged plant therefore, creates 104 job opportunity and about 784368 Birr of
income.

7.2 Training Requirement

Training of key personnel shall be conducted In the first year of the operation process.
This can be arranged with the suppliers of the plant machineries and Ethiopian Leather
Technology Institute. The training should primarily focuses on the production technology

7
and machinery maintenance and trouble shooting. Birr 100,000 will be allocated as
training expense.

8 Financial Analysis
8.1 Underlying Assumption

The financial analysis of Leather Shoes Producing plant is based on the data provided in
the preceding chapters and the following assumptions.

A. Construction and Finance

Construction period 2 year

Source of finance 40% equity and 60% loan
Tax holidays 2 years
Bank interest rate 12%
Discount for cash flow 18%
Value of land Based on lease rate of ANRS
Spare Parts, Repair & Maintenance 3% of fixed investment

B. Depreciation

Building 5%
Machinery and equipment 10%
Office furniture 10%
Vehicles 20%
Pre-production (amortization) 20%

8
 C. Working Capital (Minimum Days of Coverage)

Raw Material-Local 30
Raw Material-Foreign 120
Factory Supplies in Stock 30
Spare Parts in Stock and Maintenance 30
Work in Progress 10
Finished Products 15
Accounts Receivable 30
Cash in Hand 30
Accounts Payable 30

8.2 Investment
The total investment cost of the project including working capital is estimated at Birr
11.34 million as shown in Table 4 below. The Owner shall contribute 40% of the finance
in the form of equity while the remaining 60% is to be financed by bank loan.

Table 4: Total Initial Investment

Total Initial Investment

Item Cost
Land 15,000.00
Building and civil works 7,000,000.00
Office equipment 120,000.00
Vehicles 500,000.00
Plant machinery & equipment 505,000.00
Total Fixed Investment 8,140,000.00
Pre production capital expenditure 407,000.00
Total Initial Investment 8,547,000.00
Working capital at full capacity 2,793,161.25
Total 11,340,161.25
*Pre-production capital expenditure includes - all expenses for pre-
investment studies, consultancy fee during construction and expenses for
company‘s establishment, project administration expenses, commission
expenses, preproduction marketing and interest expenses during
construction.

9
The foreign component of the project accounts for Birr 505,000 or 4.45% of the total
investment cost.

8.3 Production Costs

The total production cost at full capacity operation is estimated at Birr 15.7 million as
detailed in Table 5 below.

Table 5: Production Cost

Total Production Cost at Full Capacity

Items Cost
1. Raw materials 12,782,000.00
2. Utilities 240,690.00
3. Wages and Salaries 1,024,368.00
4. Spares and Maintenance 244,200.00
Factory costs 14,291,258.00
5. Depreciation 593,900.00
6. Financial costs
816,491.61
Total Production Cost 15,701,649.61

8.4 Financial evaluation

I. Profitability

According to the projected income statement attached in the annex part the project will
generate profit beginning from the first year of operation. Ratios such as the percentage
of net profit to total sales, return on equity and return on total investment are 14.66%,
39.08% and 55% in the first year and are gradually rising. Furthermore, the income
statement and other profitability indicators show that the project is viable.

II. Breakeven Analysis

The breakeven point of the project is estimated by using income statement projection.
Accordingly, the project will break even at 17.52% of capacity utilization.

10
 III. Payback Period

Investment cost and income statement projection are used in estimating the project
payback period. The projects will payback fully the initial investment less working
capital in second year.

IV. Simple Rate of Return

For the envisaged plant the simple rate of return equals to 32.8%

V. Internal Rate of Return and Net Present Value

Based on cash flow statement described in the annex part, the calculated IRR of the
project is 37.7% and the net present value at 18 % discount is Birr 7.7 million.

VI. Sensitivity Analysis

The envisaged plant is profitable even with considerable cost increment. That is the plant
maintains to be profitable starting from the first year when 10 % cost increment takes
place in the sector. This result is accompanied by IRR value of 39.9% with payback
period of same year.

9 Economic and Social Benefit and Justification

The envisaged project possesses wide range of benefits where it promotes the socio-
economic goals and objectives stated in the strategic plan of the Amhara National
Regional State. These benefits are listed as follows

A. Profit Generation

The project is found to be financially viable and earns on average a profit of Birr 3.48
million per year and Birr 34.8 million within the project life. Such result induces the
project promoters to reinvest the profit which, therefore, increases the investment
magnitude in the region.

11
 B. Tax Revenue

In the project life under consideration, the region will collect about Birr 12 million from
corporate tax payment alone (i.e. excluding income tax, sales tax and VAT). Such result
create additional fund for the regional government that will be used in expanding social
and other basic services in the region

C. Import Substitution and Foreign Exchange Saving

Based on the projected figure we learn that in the project life an estimated amount of US
Dollar 19.7 million will be saved as a result of the proposed project. This will create
room for the saved hard currency to be allocated on other vital and strategic sectors

D. Employment and Income Generation

The proposed project is expected to create employment opportunity to several citizens of

the region. That is, it will provide permanent employment to 104 professionals as well as
support stuffs. Consequently the project creates income of Birr 653640 per year. This
would be one of the commendable accomplishments of the project.

E. Diversification and InterSectoral Linkage.

The proposed project helps to diversify ANRS’ and Ethiopian economy. It contributes to
industrialization of the ANRS as well as the country as a whole. It also has a potential to
strengthen the linkage between the manufacturing and the trade sub-sectors.

12
ANNEXES

13
 Annex 1: Total Net Working Capital Requirements (in Birr)
CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4

Capacity Utilization (%) 0 0 85% 100% 100% 100%

1. Total Inventory 0 0 3,442,153 4,049,591 4,049,591 4,049,591

Raw Materials in Stock- Total 0 0 1,185,240 1,394,400 1,394,400 1,394,400

Raw Material-Local 0 0 1,185,240 1,394,400 1,394,400 1,394,400

Raw Material-Foreign 0 0 0 0 0 0

Factory Supplies in Stock 0 0 13,803 16,239 16,239 16,239

Spare Parts in Stock and Maintenance 0 0 22,644 26,640 26,640 26,640

Work in Progress 0 0 345,075 405,971 405,971 405,971

Finished Products 0 0 690,150 811,942 811,942 811,942

2. Accounts Receivable 0 0 1,856,400 2,184,000 2,184,000 2,184,000

3. Cash in Hand 0 0 117,346 138,054 138,054 138,054

CURRENT ASSETS 0 0 4,230,659 4,977,246 4,977,246 4,977,246

4. Current Liabilities 0 0 1,856,400 2,184,000 2,184,000 2,184,000

Accounts Payable 0 0 1,856,400 2,184,000 2,184,000 2,184,000

TOTAL NET WORKING CAPITAL REQUIREMENTS 0 0 2,374,259 2,793,246 2,793,246 2,793,246

INCREASE IN NET WORKING CAPITAL 0 0 2,374,259 418,987 0 0

1
 Annex 1: Total Net Working Capital Requirements (in Birr) (continued)
PRODUCTION
5 6 7 8 9 10

Capacity Utilization (%) 100% 100% 100% 100% 100% 100%

1. Total Inventory 4,049,591 4,049,591 4,049,591 4,049,591 4,049,591 4,049,591

Raw Materials in Stock-Total 1,394,400 1,394,400 1,394,400 1,394,400 1,394,400 1,394,400

Raw Material-Local 1,394,400 1,394,400 1,394,400 1,394,400 1,394,400 1,394,400

Raw Material-Foreign 0 0 0 0 0 0

Factory Supplies in Stock 16,239 16,239 16,239 16,239 16,239 16,239

Spare Parts in Stock and Maintenance 26,640 26,640 26,640 26,640 26,640 26,640

Work in Progress 405,971 405,971 405,971 405,971 405,971 405,971

Finished Products 811,942 811,942 811,942 811,942 811,942 811,942

2. Accounts Receivable 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000

3. Cash in Hand 138,054 138,054 138,054 138,054 138,054 138,054

CURRENT ASSETS 4,977,246 4,977,246 4,977,246 4,977,246 4,977,246 4,977,246

4. Current Liabilities 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000

Accounts Payable 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000

TOTAL NET WORKING CAPITAL REQUIREMENTS 2,793,246 2,793,246 2,793,246 2,793,246 2,793,246 2,793,246

INCREASE IN NET WORKING CAPITAL 0 0 0 0 0 0

2
 CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL CASH INFLOW 4,273,500 7,066,746 18,873,400 20,347,600 20,020,000 20,020,000
1. Inflow Funds 4,273,500 7,066,746 1,856,400 327,600 0 0
Total Equity 1,709,400 2,826,698 0 0 0 0
Total Long Term Loan 2,564,100 4,240,047 0 0 0 0
Total Short Term Finances 0 0 1,856,400 327,600 0 0
2. Inflow Operation 0 0 17,017,000 20,020,000 20,020,000 20,020,000
Sales Revenue 0 0 17,017,000 20,020,000 20,020,000 20,020,000
Interest on Securities 0 0 0 0 0 0
3. Other Income 0 0 0 0 0 0
TOTAL CASH OUTFLOW 4,273,500 4,273,500 18,159,377 16,981,988 17,437,560 17,342,302

3
4. Increase In Fixed Assets 4,273,500 4,273,500 0 0 0 0
Fixed Investments 4,070,000 4,070,000 0 0 0 0
Pre-production Expenditures 203,500 203,500 0 0 0 0
5. Increase in Current Assets 0 0 4,230,659 746,587 0 0
6. Operating Costs 0 0 12,155,426 14,284,879 14,284,879 14,284,879
7. Corporate Tax Paid 0 0 0 0 1,338,242 1,379,067
8. Interest Paid 0 0 1,773,292 816,498 680,415 544,332
9.Loan Repayments 0 0 0 1,134,025 1,134,025 1,134,025
10.Dividends Paid 0 0 0 0 0 0
Surplus (Deficit) 0 2,793,246 714,023 3,365,612 2,582,440 2,677,698
Cumulative Cash Balance 0 2,793,246 3,507,269 6,872,881 9,455,320 12,133,018

4
 Annex 2: Cash Flow Statement (in Birr): Continued
PRODUCTION
5 6 7 8 9 10
TOTAL CASH INFLOW 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000
1. Inflow Funds 0 0 0 0 0 0
Total Equity 0 0 0 0 0 0
Total Long Term Loan 0 0 0 0 0 0
Total Short Term Finances 0 0 0 0 0 0
2. Inflow Operation 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000
Sales Revenue 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000
Interest on Securities 0 0 0 0 0 0
3. Other Income 0 0 0 0 0 0
TOTAL CASH OUTFLOW 17,247,044 17,206,206 17,110,948 15,881,665 15,881,665 15,881,665
4. Increase In Fixed Assets 0 0 0 0 0 0
Fixed Investments 0 0 0 0 0 0
Pre-production Expenditures 0 0 0 0 0 0
5. Increase in Current Assets 0 0 0 0 0 0
6. Operating Costs 14,284,879 14,284,879 14,284,879 14,284,879 14,284,879 14,284,879
7. Corporate Tax Paid 1,419,892 1,515,137 1,555,961 1,596,786 1,596,786 1,596,786
8. Interest Paid 408,249 272,166 136,083 0 0 0
9. Loan Repayments 1,134,025 1,134,025 1,134,025 0 0 0
10.Dividends Paid 0 0 0 0 0 0
Surplus (Deficit) 2,772,956 2,813,794 2,909,052 4,138,335 4,138,335 4,138,335
Cumulative Cash Balance 14,905,974 17,719,768 20,628,820 24,767,155 28,905,490 33,043,824
Annex 3: DISCOUNTED CASH FLOW-TOTAL CAPITAL INVESTED

5
 CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL CASH INFLOW 0 0 17,017,000 20,020,000 20,020,000 20,020,000

1. Inflow Operation 0 0 17,017,000 20,020,000 20,020,000 20,020,000

Sales Revenue 0 0 17,017,000 20,020,000 20,020,000 20,020,000

Interest on Securities 0 0 0 0 0 0

2. Other Income 0 0 0 0 0 0

TOTAL CASH OUTFLOW 4,273,500 4,273,500 14,529,685 14,703,866 15,623,121 15,663,946

3. Increase in Fixed Assets 4,273,500 4,273,500 0 0 0 0

Fixed Investments 4,070,000 4,070,000 0 0 0 0

Pre-production Expenditures 203,500 203,500 0 0 0 0

4. Increase in Net Working Capital 0 0 2,374,259 418,987 0 0

5. Operating Costs 0 0 12,155,426 14,284,879 14,284,879 14,284,879

6. Corporate Tax Paid 0 0 0 0 1,338,242 1,379,067

NET CASH FLOW -4,273,500 -4,273,500 2,487,315 5,316,134 4,396,879 4,356,054

CUMULATIVE NET CASH FLOW -4,273,500 -8,547,000 -6,059,685 -743,551 3,653,329 8,009,383

Net Present Value (at 18%) -4,273,500 -3,621,610 1,786,351 3,235,563 2,267,861 1,904,071

Cumulative Net present Value -4,273,500 -7,895,110 -6,108,759 -2,873,196 -605,334 1,298,737

Annex 3: DISCOUNTED CASH FLOW-TOTAL CAPITAL INVESTED (Continued)

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 PRODUCTION
5 6 7 8 9 10
TOTAL CASH INFLOW 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000

1. Inflow Operation 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000

Sales Revenue 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000

Interest on Securities 0 0 0 0 0 0

2. Other Income 0 0 0 0 0 0

TOTAL CASH OUTFLOW 15,704,771 15,800,016 15,840,840 15,881,665 15,881,665 15,881,665

3. Increase in Fixed Assets 0 0 0 0 0 0

Fixed Investments 0 0 0 0 0 0

Pre-production Expenditures 0 0 0 0 0 0

4. Increase in Net Working Capital 0 0 0 0 0 0

5. Operating Costs 14,284,879 14,284,879 14,284,879 14,284,879 14,284,879 14,284,879

6. Corporate Tax Paid 1,419,892 1,515,137 1,555,961 1,596,786 1,596,786 1,596,786

NET CASH FLOW 4,315,229 4,219,984 4,179,160 4,138,335 4,138,335 4,138,335

CUMULATIVE NET CASH FLOW 12,324,612 16,544,597 20,723,756 24,862,091 29,000,426 33,138,760

Net Present Value (at 18%) 1,598,497 1,324,759 1,111,816 933,013 790,689 670,075

Cumulative Net present Value 2,897,234 4,221,993 5,333,809 6,266,822 7,057,510 7,727,585

Net Present Value (at 18%) 7,727,585.45

Internal Rate of Return 37.7%

Annex 4: NET INCOME STATEMENT ( in Birr)
PRODUCTION

7
 1 2 3 4 5
Capacity Utilization (%) 85% 100% 100% 100% 100%

1. Total Income 17,017,000 20,020,000 20,020,000 20,020,000 20,020,000

Sales Revenue 17,017,000 20,020,000 20,020,000 20,020,000 20,020,000
Other Income 0 0 0 0 0
2. Less Variable Cost 11,718,466 13,786,431 13,786,431 13,786,431 13,786,431
VARIABLE MARGIN 5,298,534 6,233,569 6,233,569 6,233,569 6,233,569
(In % of Total Income) 31.14 31.14 31.14 31.14 31.14
3. Less Fixed Costs 1,030,860 1,092,348 1,092,348 1,092,348 1,092,348
OPERATIONAL MARGIN 4,267,674 5,141,221 5,141,221 5,141,221 5,141,221
(In % of Total Income) 25.08 25.68 25.68 25.68 25.68
4. Less Cost of Finance 1,773,292.35 816,497.69 680,414.74 544,331.79 408,248.85
5. GROSS PROFIT 2,494,381.77 4,324,723.33 4,460,806.28 4,596,889.23 4,732,972.17
6. Income (Corporate) Tax 0.00 0.00 1,338,241.88 1,379,066.77 1,419,891.65
7. NET PROFIT 2,494,381.77 4,324,723.33 3,122,564.39 3,217,822.46 3,313,080.52
RATIOS (%)
Gross Profit/Sales 14.66% 21.60% 22.28% 22.96% 23.64%
Net Profit After Tax/Sales 14.66% 21.60% 15.60% 16.07% 16.55%
Return on Investment 39.08% 45.34% 33.54% 33.18% 32.82%
Return on Equity 54.99% 95.34% 68.84% 70.94% 73.04%
Annex 4: NET INCOME STATEMENT (in Birr): Continued
PRODUCTION

8
 6 7 8 9 10
Capacity Utilization (%) 100% 100% 100% 100% 100%

1. Total Income 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000

Sales Revenue 20,020,000 20,020,000 20,020,000 20,020,000 20,020,000
Other Income 0 0 0 0 0
2. Less Variable Cost 13,786,431 13,786,431 13,786,431 13,786,431 13,786,431
VARIABLE MARGIN 6,233,569 6,233,569 6,233,569 6,233,569 6,233,569
(In % of Total Income) 31.14 31.14 31.14 31.14 31.14
3. Less Fixed Costs 910,948 910,948 910,948 910,948 910,948
OPERATIONAL MARGIN 5,322,621 5,322,621 5,322,621 5,322,621 5,322,621
(In % of Total Income) 26.59 26.59 26.59 26.59 26.59
4. Less Cost of Finance 272,166 136,083 0 0 0
5. GROSS PROFIT 5,050,455 5,186,538 5,322,621 5,322,621 5,322,621
6. Income (Corporate) Tax 1,515,137 1,555,961 1,596,786 1,596,786 1,596,786
7. NET PROFIT 3,535,319 3,630,577 3,725,835 3,725,835 3,725,835
RATIOS (%)
Gross Profit/Sales 25.23% 25.91% 26.59% 26.59% 26.59%
Net Profit After Tax/Sales 17.66% 18.13% 18.61% 18.61% 18.61%
Return on Investment 33.57% 33.21% 32.85% 32.85% 32.85%
Return on Equity 77.94% 80.04% 82.14% 82.14% 82.14%

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 Annex 5: Projected Balance Sheet (in Birr)
CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL ASSETS 4,273,500 11,340,246 15,691,027 19,209,326 21,197,866 23,281,664
1. Total Current Assets 0 2,793,246 7,737,927 11,850,126 14,432,566 17,110,264
Inventory on Materials and Supplies 0 0 1,221,687 1,437,279 1,437,279 1,437,279
Work in Progress 0 0 345,075 405,971 405,971 405,971
Finished Products in Stock 0 0 690,150 811,942 811,942 811,942
Accounts Receivable 0 0 1,856,400 2,184,000 2,184,000 2,184,000
Cash in Hand 0 0 117,346 138,054 138,054 138,054
Cash Surplus, Finance Available 0 2,793,246 3,507,269 6,872,881 9,455,320 12,133,018
Securities 0 0 0 0 0 0
2. Total Fixed Assets, Net of Depreciation 4,273,500 8,547,000 7,953,100 7,359,200 6,765,300 6,171,400
Fixed Investment 0 4,070,000 8,140,000 8,140,000 8,140,000 8,140,000
Construction in Progress 4,070,000 4,070,000 0 0 0 0
Pre-Production Expenditure 203,500 407,000 407,000 407,000 407,000 407,000
Less Accumulated Depreciation 0 0 593,900 1,187,800 1,781,700 2,375,600
3. Accumulated Losses Brought Forward 0 0 0 0 0 0
4. Loss in Current Year 0 0 0 0 0 0
TOTAL LIABILITIES 4,273,500 11,340,246 15,691,027 19,209,326 21,197,866 23,281,664
5. Total Current Liabilities 0 0 1,856,400 2,184,000 2,184,000 2,184,000
Accounts Payable 0 0 1,856,400 2,184,000 2,184,000 2,184,000
Bank Overdraft 0 0 0 0 0 0
6. Total Long-term Debt 2,564,100 6,804,147 6,804,147 5,670,123 4,536,098 3,402,074
Loan A 2,564,100 6,804,147 6,804,147 5,670,123 4,536,098 3,402,074
Loan B 0 0 0 0 0 0
7. Total Equity Capital 1,709,400 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098
Ordinary Capital 1,709,400 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098
Preference Capital 0 0 0 0 0 0
Subsidies 0 0 0 0 0 0
8. Reserves, Retained Profits Brought Forward 0 0 0 2,494,382 6,819,105 9,941,669
9.Net Profit After Tax 0 0 2,494,382 4,324,723 3,122,564 3,217,822
Dividends Payable 0 0 0 0 0 0
Retained Profits 0 0 2,494,382 4,324,723 3,122,564 3,217,822

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 Annex 5: Projected Balance Sheet (in Birr): Continued
PRODUCTION
5 6 7 8 9 10
TOTAL ASSETS 25,460,720 27,862,014 30,358,566 34,084,401 37,810,235 41,536,070
1. Total Current Assets 19,883,220 22,697,014 25,606,066 29,744,401 33,882,735 38,021,070
Inventory on Materials and Supplies 1,437,279 1,437,279 1,437,279 1,437,279 1,437,279 1,437,279
Work in Progress 405,971 405,971 405,971 405,971 405,971 405,971
Finished Products in Stock 811,942 811,942 811,942 811,942 811,942 811,942
Accounts Receivable 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000
Cash in Hand 138,054 138,054 138,054 138,054 138,054 138,054
Cash Surplus, Finance Available 14,905,974 17,719,768 20,628,820 24,767,155 28,905,490 33,043,824
Securities 0 0 0 0 0 0
2. Total Fixed Assets, Net of Depreciation 5,577,500 5,165,000 4,752,500 4,340,000 3,927,500 3,515,000
Fixed Investment 8,140,000 8,140,000 8,140,000 8,140,000 8,140,000 8,140,000
Construction in Progress 0 0 0 0 0 0
Pre-Production Expenditure 407,000 407,000 407,000 407,000 407,000 407,000
Less Accumulated Depreciation 2,969,500 3,382,000 3,794,500 4,207,000 4,619,500 5,032,000
3. Accumulated Losses Brought Forward 0 0 0 0 0 0
4. Loss in Current Year 0 0 0 0 0 0
TOTAL LIABILITIES 25,460,720 27,862,014 30,358,566 34,084,401 37,810,235 41,536,070
5. Total Current Liabilities 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000
Accounts Payable 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000 2,184,000
Bank Overdraft 0 0 0 0 0 0
6. Total Long-term Debt 2,268,049 1,134,025 0 0 0 0
Loan A 2,268,049 1,134,025 0 0 0 0
Loan B 0 0 0 0 0 0
7. Total Equity Capital 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098
Ordinary Capital 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098 4,536,098
Preference Capital 0 0 0 0 0 0
Subsidies 0 0 0 0 0 0
8. Reserves, Retained Profits Brought Forward 13,159,492 16,472,572 20,007,891 23,638,468 27,364,302 31,090,137
9. Net Profit After Tax 3,313,081 3,535,319 3,630,577 3,725,835 3,725,835 3,725,835
Dividends Payable 0 0 0 0 0 0
Retained Profits 3,313,081 3,535,319 3,630,577 3,725,835 3,725,835 3,725,835

11