Investment Office ANRS

Project Profile on the Establishment

of Leather Shoe Upper Making 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........................................................................................3
3.1.3 Pricing and Distribution...............................................................................4
3.2 Plant Capacity......................................................................................................4
3.3 Production Program.............................................................................................4
4. Raw Materials and Utilities....................................................................5
4.1 Availability and Source of Raw Materials...........................................................5
4.2 Annual Requirement and Cost of Raw Materials and Utilities...........................5
5 Location and Site.....................................................................................6
6 Technology and Engineering..................................................................6
6.1 Production Process...............................................................................................6
6.2 Machinery and Equipment...................................................................................6
6.3 Civil Engineering Cost........................................................................................7
7 Human Resource and Training Requirement......................................8
7.1 Human Resource..................................................................................................8
7.2 Training Requirement..........................................................................................8
8 Financial Analysis...................................................................................9
8.1 Underlying Assumption.......................................................................................9
8.2 Investment..........................................................................................................10
8.3 Production Costs................................................................................................10
8.4 Financial evaluation...........................................................................................11
9 Economic and Social Benefit and Justification..................................12
ANNEXES....................................................................................................14
 1. Executive Summary
This project profile deals with the establishment of leather shoe upper making plant in Amhara
National Regional State. The following presents the main findings of the study

Demand projection divulges that the domestic demand for the proposed product is substantial
and is increasing with time. Accordingly, the planned plant is set to produce 10,000 m 2 annually.
The total investment cost of the project including working capital is estimated at Birr 2.24
million and creates 35 job opportunity and Birr 425.52 thousand of income

The financial result indicates that the project will generate profit beginning from the first year of
operation. Moreover, the project will break even at 27.4% of capacity utilization and it will
payback fully the initial investment less working capital in 2 years. The result further show that
the calculated IRR of the project is 34.0% and the net present value at 18 % discount is Birr
1,365,270.36

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

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

Basically leather is animal skin that has been chemically modified to produce a strong, flexible
material that resists decay. It is used for a wide range of products including shoe upper
production. Lather upper represents the upper parts or covers of shoes made from finished
leather. With increasing specialization of all types of manufacturing activities, leather shoe upper
are prepared separately and supplied to leather shoes manufacturing factories.

1
 3. Market Study, Plant Capacity and Production Program

3.1 Market Study

3.1.1 Present Demand and Supply

The demand for leather shoe upper is a derived demand. That is, its demand is dictated by the
demand for shoe. Basically, the country in general and the Amhara region in particular is
endowed with ample resource base. According to CSA, Annual Abstract (2008), in 2006/07
Ethiopia has got 43.1 million cattle, 23.6 million sheep and 18.6 million goats. On the other hand
the Ministry of Agriculture and Rural Development estimated that the skin removal rate is 7%
for cattle, 33% for sheep and 37% for goats. This translates in to an output of 3.02 million hides,
7.8 million Sheep skins and 6.9 million Goat skins in 2006/07. On average, therefore, Ethiopia
has the capacity to supply 16 to 18 million pieces of hides and skins to local tanneries where
more than one-fourth of the product is estimated to be the share of Amhara region.

At present there are 22 tanneries (and 4 under construction) which are mainly producing semi
processed products for export. It is only 6 plants that have the capacity to process finished
products for domestic leather industries. The majority of the finished leather (85%) is locally
consumed by shoe and garment producers while a small proportion (15%) is sold abroad
(Ethiopia: Country Economic Memorandum, World Bank; 2004). There are also a number of
medium and small industries that produce leather garment, footwear, and leather articles mainly
for domestic markets.

As discussed earlier, there is a strong correlation between leather shoe upper and leather shoe
demand. This is clearly seen in the following table.

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 Table 1: Domestic Production of Leather Upper and Leather Shoe

Leather Upper and Leather shoes and

Year lining (000 sq.m) Boots (pairs)
1997/98 545 1,080,460
1998/99 747 1,400,748
1999/00 1,026 1,585,034
2000/01 501 1,326,253
2001/02 923 1,098,574
2002/03 520 866,994
2003/04 739 1,081,488
2004/05 685 846,044
2005/06 608 1,287,012

Source: CSA, (various yeas)

The above table shows that the annual demand for leather upper and lining has grown on average
by 11 percent while it is 5.4% for leather shoe and boots. In general it reveals that there is
promising demand in leather upper products as a result of growing demand in leather shoes both
at domestic and abroad.

To estimate the present demand, if we conservatively assume that the production of 4 pair of
shoe requires 1 sq.m of leather shoe upper, about 322 thousand sq.m of leather shoe upper would
be demanded by the leather shoe and boot industry in 2005/06 alone.

3.1.2 Projected Demand

The analysis presented earlier indicates the presence of high demand for leather shoe upper. The
strategic plan of the government (PASDEP), sets a target to export 20 million of leather foot
wear in 2009/10. If we consider only 20% of this target (i.e. 4 million pairs), the corresponding
demand for leather shoe upper would be about 1,000 thousand sq.m. This is developed based on
the assumption that 4 pair of shoe requires 1 sq.m of leather shoe upper. Comparing this export
demand with the estimated production figure of 2005/06 (which is 322 thousand sq.m) reveals
the presence of huge and growing demand for the product under study.

In forecasting the future effective demand, it is assumed that demand would grow at least by 5
percent in line with the growth of leather shoe production. Accordingly, the projected demand is
presented in table 2 here under.

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Table 2: Projected Demand for Leather Shoe Upper (in 000 sq.m)

Year Projected Demand

(in ‘000 m2)
2008/09 372
2009/10 391
2010/11 411
2011/12 431
2012/13 453
2013/14 475
2014/15 499
2015/16 524
2016/17 550
2017/18 578

According to the above table demand for leather shoe upper substantially increases in the future.
This suggests the significance of entering in to the sector with modern machineries and skilled
human resource.

3.1.3 Pricing and Distribution

Based on the market research result and the capacity of the envisaged plant, the selling price is
set to be Birr 260 per sq.m. of leather shoe upper. In distributing the output, the envisaged plant
shall make use of the available retail and wholesale network.

3.2 Plant Capacity

Thus, given the expected demand as presented earlier and the planned technology, the envisaged
plant is set to produce 10,000 m2 of leather shoe upper annually.

3.3 Production Program

The program is scheduled based on the consideration that the envisaged plant will work 275 days
in a year in 1 shift, where the remaining days will be holidays and for maintenance. During the
first year of operation the plant will operate at 75 percent capacity and then it grows to 90
percent in the 2nd year. The capacity will grow to 100 percent starting from the 3 rd year. This
consideration is developed based on the assumption that there is ample demand for the product
and logistics barriers would take place only for the first two years of operation.

4
 4. Raw Materials and Utilities
4.1 Availability and Source of Raw Materials
It is possible to envisage a plant that is integrated so that it starts processing raw hides and skins
and produces finished leather including shoe uppers. However, this profile is prepared with the
consideration that the proposed plant produces lather shoe upper from semi processed leather.
Therefore, the main raw material will be crust and wet blue skin which can be acquired from
tanneries operating in Addis Ababa as well as in the Amhara region. Finishing chemicals shall be
imported from abroad.

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 3 here under

Table 3: Material and Utility Requirement

Total Cost
Material and Input Quantity L.C. F.C.
2
Crust and Wet Blue Skin 10,500 m 820,000
Lacquer emulsions 0.2 tons 15,000
Sodium bicarbonate 0.15 tons 3,500
Sodium acetate 0.2 tons 6,000
Dyes (different colors) 0.2 tons 20,000
Packing 1,000 pcs 3,500
Total Material Cost 823,500 44,500
Utility
Electricity 85,000 kwh 46,750
Furnace Oil 7,500 lit 52,500
Water 15,000m3 39,750
Total Utility Cost 139,000

Accordingly, the total material and utility cost at full capacity of operation is estimated to be Birr
1,007,000

5 Location and Site

5
The appropriate locations for the envisaged project in view of the availability of input,
infrastructure as well as market for the output are Bahir Dar, Debre Birhan and Combolcha
Town.

6 Technology and Engineering

6.1 Production Process

The production process that will produce leather shoe upper at the end of the day is presented as
follows. First of semi processed skin received from other plants is first classified, palleted and
shaved. Then re tanning of the skin is conducted followed by pre finishing activities that involve
color dying, stretching, drying using hot air, and then ironing. After this the final step is the
cutting of leather according to the designs supplied by the customer (shoe manufacturer) with the
help of patterns on clicking press. Similarly lining component of suitable material is also cut. The
upper components are skived and folded according to the design and lining as joined with it
using suitable joining solutions. Then follow the stitching on various types of machines,
eyeleting and cleaning. The finished uppers are then brushed and packed for sale.

The alternative production approach requires starting the process from the raw hides and skins
instead of obtaining semi finished hides and skins and translating it into finished leather. This
approach, however, is not adopted as it requires large sum of investment and is not
environmentally attractive. Besides, the existing processing plants can easily supply the small
amount of semi finished leather required by the envisaged plant.

6.2 Machinery and Equipment

The machineries and equipment required for producing leather shoe upper is detailed in table 4
below

6
Table 4: Machinery and Equipment

Machinery and Equipment Quantity

Drum with 5HP motor shaft pulley 1
Electrical Unit Heater for Stuffing Drum 5HP 1
Electrical Hand Operated Setting Out Machine 1
Spraying Machine with Dryer 1
Pattern Shearing Machine 1
Cylinder Bed Sewing Machine 1
Upper Folding and Brushing Machine 1

The, total cost of machinery and equipment including freight insurance and bank cost is
estimated to be about Birr 1,200,000

The following are some of the machineries suppliers’ address for the envisaged project
B. K. Associates, Chennai
Mouda Ibrahim Street, Nagalkeni, Chrompet
Chennai, Tamil Nadu, India
Phone: +(91)-(44)-22485442
Fax: +(91)-(44)-22485441

Mac-India International
Anna Salai, Nandanam
Chennai, Tamil Nadu, India
Phone: +(91)-(44)-24355454/52178079
Fax: +(91)-(44)-24355454

6.3 Civil Engineering Cost

The total site area for the envisaged plant is estimated to be 300m 2 where 200m2 is allocated to
the production place and the remaining space is left for stores (60m 2), office buildings and
facilities (40m2).

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7 Human Resource and Training Requirement
7.1 Human Resource

The list of required manpower for the envisaged plant is stated in table 5 below

Table 5: Human Resource Requirement

Monthly Total Annual

Position No. Required Salary Salary
Manager 1 4500 54000
Accountant 1 1200 14400
Secretary 1 850 10200
Sales Clerk 1 800 9600
Store Keeper 1 800 9600
Technicians 2 1000 24000
Supervisors 2 1500 36000
Operators 15 800 144000
Laborers 5 400 24000
Cleaners 2 400 9600
Guards 4 400 19200
Benefit (20%) 70920
Total 35 425520

The envisaged plant creates 35 job opportunity and about Birr 425.52 thousand of income. The
professionals and support staffs for the envisaged plant shall be recruited from Amhara region

7.2 Training Requirement

Training of key personnel shall be conducted in consultation with the suppliers of the plant
machineries. The training should primarily focuses on the production technology and machinery
maintenance and trouble shooting. Birr 25,000 will be allocated as training expense.

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8 Financial Analysis
8.1 Underlying Assumption

The financial analysis of leather shoe upper 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%

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

9
 8.2 Investment
The total investment cost of the project including working capital is estimated at Birr 2.25
million as shown in table 6 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 6: Total initial investment

Items L.C F.C Total

Land
900 900
Building and civil works
600,000 600,000
Office equipment
40,000 40,000
Vehicles
Plant machinery & equipment
1,200,000 1,200,000
Total fixed investment cost
640,900 1,200,000 1,840,900
Pre production capital
expenditure* 92,045 92,045
Total initial investment
732,945 1,200,000 1,932,945
Working capital at full capacity
295,087 19,418 314,505
Total 1,028,032 1,219,418 2,247,450
*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.

The foreign component of the project accounts for 54.3% of the total investment cost.

8.3 Production Costs

The total production cost at full capacity operation is estimated at Birr 1.79 million as detailed in
table 7 below.

10
 Table 7: Production Cost

Items Cost
1. Raw materials 868,000
2. Utilities 139,000
3. Wages and Salaries 425,520
4. Spares and Maintenance 55,227
Factory costs 1,487,747
5. Depreciation 172,409
6. Financial costs 134,847
Total Production Cost 1,795,003

8.4 Financial evaluation

I. Profitability

According to the projected income statement attached in the annex part (see annex 4) 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 16%, 35% and 31% 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 27.4% of capacity utilization.

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 2 years of
operation.

IV. Simple Rate of Return

For the envisaged plant the simple rate of return equals to 31.0%

11
 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
34.0% and the net present value at 18 % discount is Birr 1,365,270.36

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 with payback period of 2 years and 5 months time.

9 Economic and Social Benefit and Justification

The envisaged project possesses wide range of benefits that promote the socio-economic goals
and objectives stated in the strategic plan of the Amhara National Regional State. It boosts inter
sectorial linkage between the agricultural (livestock) and industrial sector. At the same time,
therefore, it helps diversify the economic activity of the region. The other major benefits are
listed as follows:

A. Profit Generation

The project is found to be financially viable and earns a profit of Birr 6.15 million within the
project life. Such result induces the project promoters to reinvest the profit which, therefore,
increases the investment magnitude in the region.

B. Tax Revenue

In the project life under consideration, the region will collect about Birr 2.2 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

12
 C. 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 35 professionals as well as support
stuffs. Consequently the project creates income of Birr 425.52 thousands per year. This would be
one of the commendable accomplishments of the project.

D. Pro Environment Project

The proposed production process is environment friendly as semi-processed leather is used as

input in the production process.

13
ANNEXES

14
 Annex 1: Total Net Working Capital Requirements (in Birr)
CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4

Capacity Utilization (%) 0.00 0.00 75% 90% 100% 100%

1. Total Inventory 0.00 0.00 271631.91 325958.29 362175.88 362175.88

Raw Materials in Stock- Total 0.00 0.00 81940.91 98329.09 109254.55 109254.55

Raw Material-Local 0.00 0.00 67377.27 80852.73 89836.36 89836.36

Raw Material-Foreign 0.00 0.00 14563.64 17476.36 19418.18 19418.18

Factory Supplies in Stock 0.00 0.00 1358.31 1629.97 1811.08 1811.08

Spare Parts in Stock and Maintenance 0.00 0.00 4518.57 5422.29 6024.76 6024.76

Work in Progress 0.00 0.00 33957.74 40749.28 45276.98 45276.98

Finished Products 0.00 0.00 67915.47 81498.57 90553.96 90553.96

2. Accounts Receivable 0.00 0.00 212727.27 255272.73 283636.36 283636.36

3. Cash in Hand 0.00 0.00 46188.00 55425.60 61584.00 61584.00

CURRENT ASSETS 0.00 0.00 448606.27 538327.53 598141.70 598141.70

4. Current Liabilities 0.00 0.00 212727.27 255272.73 283636.36 283636.36

Accounts Payable 0.00 0.00 212727.27 255272.73 283636.36 283636.36

TOTAL NET WORKING CAPITAL REQUIRMENTS 0.00 0.00 235879.00 283054.80 314505.33 314505.33

INCREASE IN NET WORKING CAPITAL 0.00 0.00 235879.00 47175.80 31450.53 0.00

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 362175.88 362175.88 362175.88 362175.88 362175.88 362175.88

Raw Materials in Stock-Total 109254.55 109254.55 109254.55 109254.55 109254.55 109254.55

Raw Material-Local 89836.36 89836.36 89836.36 89836.36 89836.36 89836.36

Raw Material-Foreign 19418.18 19418.18 19418.18 19418.18 19418.18 19418.18

Factory Supplies in Stock 1811.08 1811.08 1811.08 1811.08 1811.08 1811.08

Spare Parts in Stock and Maintenance 6024.76 6024.76 6024.76 6024.76 6024.76 6024.76

Work in Progress 45276.98 45276.98 45276.98 45276.98 45276.98 45276.98

Finished Products 90553.96 90553.96 90553.96 90553.96 90553.96 90553.96

2. Accounts Receivable 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36

3. Cash in Hand 61584.00 61584.00 61584.00 61584.00 61584.00 61584.00

CURRENT ASSETS 598141.70 598141.70 598141.70 598141.70 598141.70 598141.70

4. Current Liabilities 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36

Accounts Payable 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36

TOTAL NET WORKING CAPITAL REQUIRMENTS 314505.33 314505.33 314505.33 314505.33 314505.33 314505.33

INCREASE IN NET WORKING CAPITAL 0.00 0.00 0.00 0.00 0.00 0.00

2
 Annex 2: Cash Flow Statement (in Birr)
CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL CASH INFLOW 966472.50 1280977.83 2162727.27 2382545.45 2628363.64 2600000.00
1. Inflow Funds 966472.50 1280977.83 212727.27 42545.45 28363.64 0.00
Total Equity 386589.00 512391.13 0.00 0.00 0.00 0.00
Total Long Term Loan 579883.50 768586.70 0.00 0.00 0.00 0.00
Total Short Term Finances 0.00 0.00 212727.27 42545.45 28363.64 0.00
2. Inflow Operation 0.00 0.00 1950000.00 2340000.00 2600000.00 2600000.00
Sales Revenue 0.00 0.00 1950000.00 2340000.00 2600000.00 2600000.00
Interest on Securities 0.00 0.00 0.00 0.00 0.00 0.00
3. Other Income 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL CASH OUTFLOW 966472.50 966472.50 1912386.23 1799328.62 2134800.06 2056107.31
4. Increase In Fixed Assets 966472.50 966472.50 0.00 0.00 0.00 0.00
Fixed Investments 920450.00 920450.00 0.00 0.00 0.00 0.00
Pre-production Expenditures 46022.50 46022.50 0.00 0.00 0.00 0.00
5. Increase in Current Assets 0.00 0.00 448606.27 89721.25 59814.17 0.00
6. Operating Costs 0.00 0.00 1105677.67 1323045.90 1467958.06 1467958.06
7. Corporate Tax Paid 0.00 0.00 0.00 0.00 247435.78 255526.60
8. Interest Paid 0.00 0.00 358102.29 161816.42 134847.02 107877.62
9.Loan Repayments 0.00 0.00 0.00 224745.03 224745.03 224745.03
10.Dividends Paid 0.00 0.00 0.00 0.00 0.00 0.00
Surplus(Deficit) 0.00 314505.33 250341.04 583216.84 493563.58 543892.69
Cumulative Cash Balance 0.00 314505.33 564846.37 1148063.21 1641626.79 2185519.48

3
 Annex 2: Cash Flow Statement (in Birr): Continued
PRODUCTION
5 6 7 8 9 10
TOTAL CASH INFLOW 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00
1. Inflow Funds 0.00 0.00 0.00 0.00 0.00 0.00
Total Equity 0.00 0.00 0.00 0.00 0.00 0.00
Total Long Term Loan 0.00 0.00 0.00 0.00 0.00 0.00
Total Short Term Finances 0.00 0.00 0.00 0.00 0.00 0.00
2. Inflow Operation 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00
Sales Revenue 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00
Interest on Securities 0.00 0.00 0.00 0.00 0.00 0.00
3. Other Income 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL CASH OUTFLOW 2037228.72 2023872.84 2004994.26 1761370.64 1761370.64 1761370.64
4. Increase In Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00
Fixed Investments 0.00 0.00 0.00 0.00 0.00 0.00
Pre-production Expenditures 0.00 0.00 0.00 0.00 0.00 0.00
5. Increase in Current Assets 0.00 0.00 0.00 0.00 0.00 0.00
6. Operating Costs 1467958.06 1467958.06 1467958.06 1467958.06 1467958.06 1467958.06
7. Corporate Tax Paid 263617.42 277230.94 285321.76 293412.58 293412.58 293412.58
8. Interest Paid 80908.21 53938.81 26969.40 0.00 0.00 0.00
9. Loan Repayments 224745.03 224745.03 224745.03 0.00 0.00 0.00
10.Dividends Paid 0.00 0.00 0.00 0.00 0.00 0.00
Surplus(Deficit) 562771.28 576127.16 595005.74 838629.36 838629.36 838629.36
Cumulative Cash Balance 2748290.76 3324417.92 3919423.66 4758053.02 5596682.37 6435311.73

4
 Annex 3: DISCOUNTED CASH FLOW-TOTAL CAPITAL INVESTED
CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL CASH INFLOW 0.00 0.00 1950000.00 2340000.00 2600000.00 2600000.00

1. Inflow Operation 0.00 0.00 1950000.00 2340000.00 2600000.00 2600000.00

Sales Revenue 0.00 0.00 1950000.00 2340000.00 2600000.00 2600000.00

Interest on Securities 0.00 0.00 0.00 0.00 0.00 0.00

2. Other Income 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL CASH OUTFLOW 966472.50 966472.50 1341556.67 1370221.70 1746844.37 1723484.66

3. Increase in Fixed Assets 966472.50 966472.50 0.00 0.00 0.00 0.00

Fixed Investments 920450.00 920450.00 0.00 0.00 0.00 0.00

Pre-production Expenditures 46022.50 46022.50 0.00 0.00 0.00 0.00

4. Increase in Net Working Capital 0.00 0.00 235879.00 47175.80 31450.53 0.00

5. Operating Costs 0.00 0.00 1105677.67 1323045.90 1467958.06 1467958.06

6. Corporate Tax Paid 0.00 0.00 0.00 0.00 247435.78 255526.60

NET CASH FLOW -966472.50 -966472.50 608443.33 969778.30 853155.63 876515.34

CUMMULATIVE NET CASH FLOW -966472.50 -1932945.00 -1324501.67 -354723.37 498432.26 1374947.60

Net Present Value (at 18%) -966472.50 -819044.49 436974.53 590237.01 440048.18 383132.93

Cumulative Net present Value -966472.50 -1785516.99 -1348542.47 -758305.46 -318257.27 64875.66

5
 Annex 3: DISCOUNTED CASH FLOW-TOTAL CAPITAL INVESTED (Continued)
PRODUCTION
5 6 7 8 9 10
TOTAL CASH INFLOW 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00

1. Inflow Operation 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00

Sales Revenue 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00

Interest on Securities 0.00 0.00 0.00 0.00 0.00 0.00

2. Other Income 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL CASH OUTFLOW 1731575.48 1745189.00 1753279.82 1761370.64 1761370.64 1761370.64

3. Increase in Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00

Fixed Investments 0.00 0.00 0.00 0.00 0.00 0.00

Pre-production Expenditures 0.00 0.00 0.00 0.00 0.00 0.00

4. Increase in Net Working Capital 0.00 0.00 0.00 0.00 0.00 0.00

5. Operating Costs 1467958.06 1467958.06 1467958.06 1467958.06 1467958.06 1467958.06

6. Corporate Tax Paid 263617.42 277230.94 285321.76 293412.58 293412.58 293412.58

NET CASH FLOW 868424.52 854811.00 846720.18 838629.36 838629.36 838629.36

CUMMULATIVE NET CASH FLOW 2243372.12 3098183.12 3944903.30 4783532.66 5622162.02 6460791.37

Net Present Value (at 18%) 321691.83 268346.57 225259.88 189074.08 160232.27 135790.06

Cumulative Net present Value 386567.49 654914.07 880173.95 1069248.03 1229480.30 1365270.36

Net Present Value (at 18%) 1,365,270.36

Internal Rate of Return 34.0%

Annex 4: NET INCOME STATEMENT ( in Birr)

6
 PRODUCTION
1 2 3 4 5
Capacity Utilization (%) 75% 90% 100% 100% 100%

1. Total Income 1950000.00 2340000.00 2600000.00 2600000.00 2600000.00

Sales Revenue 1950000.00 2340000.00 2600000.00 2600000.00 2600000.00
Other Income 0.00 0.00 0.00 0.00 0.00
2. Less Variable Cost 959185.17 1151022.20 1278913.56 1278913.56 1278913.56
VARIABLE MARGIN 990814.83 1188977.80 1321086.44 1321086.44 1321086.44
(In % of Total Income) 50.81 50.81 50.81 50.81 50.81
3. Less Fixed Costs 318901.50 344432.70 361453.50 361453.50 361453.50
OPERATIONAL MARGIN 671913.33 844545.10 959632.94 959632.94 959632.94
(In % of Total Income) 34 36 37 37 37
4. Less Cost of Finance 358102.29 161816.42 134847.02 107877.62 80908.21
5. GROSS PROFIT 313811.04 682728.67 824785.92 851755.32 878724.73
6. Income (Corporate) Tax 0.00 0.00 247435.78 255526.60 263617.42
7. NET PROFIT 313811.04 682728.67 577350.14 596228.73 615107.31
RATIOS (%)
Gross Profit/Sales 16% 29% 32% 33% 34%
Net Profit After Tax/Sales 16% 29% 22% 23% 24%
Return on Investment 31% 38% 32% 31% 31%
Return on Equity 35% 76% 64% 66% 68%

Annex 4: NET INCOME STATEMENT (in Birr):Continued

PRODUCTION

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

1. Total Income 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00

Sales Revenue 2600000.00 2600000.00 2600000.00 2600000.00 2600000.00
Other Income 0.00 0.00 0.00 0.00 0.00
2. Less Variable Cost 1278913.56 1278913.56 1278913.56 1278913.56 1278913.56
VARIABLE MARGIN 1321086.44 1321086.44 1321086.44 1321086.44 1321086.44
(In % of Total Income) 51 51 51 51 51
3. Less Fixed Costs 343044.50 343044.50 343044.50 343044.50 343044.50
OPERATIONAL MARGIN 978041.94 978041.94 978041.94 978041.94 978041.94
(In % of Total Income) 38 38 38 38 38
4. Less Cost of Finance 53938.81 26969.40 0.00 0.00 0.00
5. GROSS PROFIT 924103.13 951072.54 978041.94 978041.94 978041.94
6. Income (Corporate) Tax 277230.94 285321.76 293412.58 293412.58 293412.58
7. NET PROFIT 646872.19 665750.78 684629.36 684629.36 684629.36
RATIOS (%)
Gross Profit/Sales 36% 37% 38% 38% 38%
Net Profit After Tax/Sales 25% 26% 26% 26% 26%
Return on Investment 31% 31% 30% 30% 30%
Return on Equity 72% 74% 76% 76% 76%

Annex 5: Projected Balance Sheet (in Birr)

8
 CONSTRUCTION PRODUCTION
Year 1 Year 2 1 2 3 4
TOTAL ASSETS 966472.50 2247450.33 2773988.65 3274517.74 3655486.49 4026970.18
1. Total Current Assets 0.00 314505.33 1013452.65 1686390.74 2239768.49 2783661.18
Inventory on Materials and Supplies 0.00 0.00 87817.79 105381.35 117090.39 117090.39
Work in Progress 0.00 0.00 33957.74 40749.28 45276.98 45276.98
Finished Products in Stock 0.00 0.00 67915.47 81498.57 90553.96 90553.96
Accounts Receivable 0.00 0.00 212727.27 255272.73 283636.36 283636.36
Cash in Hand 0.00 0.00 46188.00 55425.60 61584.00 61584.00
Cash Surplus, Finance Available 0.00 314505.33 564846.37 1148063.21 1641626.79 2185519.48
Securities 0.00 0.00 0.00 0.00 0.00 0.00
2. Total Fixed Assets, Net of Depreciation 966472.50 1932945.00 1760536.00 1588127.00 1415718.00 1243309.00
Fixed Investment 0.00 920450.00 1840900.00 1840900.00 1840900.00 1840900.00
Construction in Progress 920450.00 920450.00 0.00 0.00 0.00 0.00
Pre-Production Expenditure 46022.50 92045.00 92045.00 92045.00 92045.00 92045.00
Less Accumulated Depreciation 0.00 0.00 172409.00 344818.00 517227.00 689636.00
3. Accumulated Losses Brought Forward 0.00 0.00 0.00 0.00 0.00 0.00
4. Loss in Current Year 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL LIABILITIES 966472.50 2247450.33 2773988.65 3274517.74 3655486.49 4026970.18
5. Total Current Liabilities 0.00 0.00 212727.27 255272.73 283636.36 283636.36
Accounts Payable 0.00 0.00 212727.27 255272.73 283636.36 283636.36
Bank Overdraft 0.00 0.00 0.00 0.00 0.00 0.00
6. Total Long-term Debt 579883.50 1348470.20 1348470.20 1123725.17 898980.13 674235.10
Loan A 579883.50 1348470.20 1348470.20 1123725.17 898980.13 674235.10
Loan B 0.00 0.00 0.00 0.00 0.00 0.00
7. Total Equity Capital 386589.00 898980.13 898980.13 898980.13 898980.13 898980.13
Ordinary Capital 386589.00 898980.13 898980.13 898980.13 898980.13 898980.13
Preference Capital 0.00 0.00 0.00 0.00 0.00 0.00
Subsidies 0.00 0.00 0.00 0.00 0.00 0.00
8. Reserves, Retained Profits Brought Forward 0.00 0.00 0.00 313811.04 996539.71 1573889.85
9.Net Profit After Tax 0.00 0.00 313811.04 682728.67 577350.14 596228.73
Dividends Payable 0.00 0.00 0.00 0.00 0.00 0.00
Retained Profits 0.00 0.00 313811.04 682728.67 577350.14 596228.73

Annex 5: Projected Balance Sheet (in Birr): Continued

PRODUCTION

9
 5 6 7 8 9 10
TOTAL ASSETS 4417332.46 4839459.61 5280465.36 5965094.71 6649724.07 7334353.43
1. Total Current Assets 3346432.46 3922559.61 4517565.36 5356194.71 6194824.07 7033453.43
Inventory on Materials and Supplies 117090.39 117090.39 117090.39 117090.39 117090.39 117090.39
Work in Progress 45276.98 45276.98 45276.98 45276.98 45276.98 45276.98
Finished Products in Stock 90553.96 90553.96 90553.96 90553.96 90553.96 90553.96
Accounts Receivable 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36
Cash in Hand 61584.00 61584.00 61584.00 61584.00 61584.00 61584.00
Cash Surplus, Finance Available 2748290.76 3324417.92 3919423.66 4758053.02 5596682.37 6435311.73
Securities 0.00 0.00 0.00 0.00 0.00 0.00
2. Total Fixed Assets, Net of Depreciation 1070900.00 916900.00 762900.00 608900.00 454900.00 300900.00
Fixed Investment 1840900.00 1840900.00 1840900.00 1840900.00 1840900.00 1840900.00
Construction in Progress 0.00 0.00 0.00 0.00 0.00 0.00
Pre-Production Expenditure 92045.00 92045.00 92045.00 92045.00 92045.00 92045.00
Less Accumulated Depreciation 862045.00 1016045.00 1170045.00 1324045.00 1478045.00 1632045.00
3. Accumulated Losses Brought Forward 0.00 0.00 0.00 0.00 0.00 0.00
4. Loss in Current Year 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL LIABILITIES 4417332.46 4839459.61 5280465.36 5965094.71 6649724.07 7334353.43
5. Total Current Liabilities 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36
Accounts Payable 283636.36 283636.36 283636.36 283636.36 283636.36 283636.36
Bank Overdraft 0.00 0.00 0.00 0.00 0.00 0.00
6. Total Long-term Debt 449490.07 224745.03 0.00 0.00 0.00 0.00
Loan A 449490.07 224745.03 0.00 0.00 0.00 0.00
Loan B 0.00 0.00 0.00 0.00 0.00 0.00
7. Total Equity Capital 898980.13 898980.13 898980.13 898980.13 898980.13 898980.13
Ordinary Capital 898980.13 898980.13 898980.13 898980.13 898980.13 898980.13
Preference Capital 0.00 0.00 0.00 0.00 0.00 0.00
Subsidies 0.00 0.00 0.00 0.00 0.00 0.00
8. Reserves, Retained Profits Brought Forward 2170118.58 2785225.89 3432098.08 4097848.86 4782478.22 5467107.57
9. Net Profit After Tax 615107.31 646872.19 665750.78 684629.36 684629.36 684629.36
Dividends Payable 0.00 0.00 0.00 0.00 0.00 0.00
Retained Profits 615107.31 646872.19 665750.78 684629.36 684629.36 684629.36

10