PROJECT PROPOSAL FOR ESTABLISHMENT OF COFFEE

PROCESSING PLANT

Profile on coffee roasting, grinding and packing project proposal

Project To Be Implemented: In South West Ethiopia, Oromia

Region,Jimma Town

Submitted To: Jimma City Administration, Land Administration Agency

and Investment Office
19, February 2018

Jimma, Ethiopia
Table of Contents
SUMMARY ..................................................................................................................................................... 6
1. General background of the project ........................................................................................................... 8
1.1. Background ........................................................................................................................................ 8
1.2. Objective of the project ................................................................................................................... 11
1.3. Project rationale............................................................................................................................... 12
1.4. The significance of the project ......................................................................................................... 14
1.5. Project Location ............................................................................................................................... 15
2. Product Description and Application ...................................................................................................... 17
3. Market study and plant capacity ............................................................................................................ 19
3.1. Market study .................................................................................................................................... 19
3.1.1. Local Market ............................................................................................................................. 19
3.2. Past Supply and present demand .................................................................................................... 20
3.2.1. Past Supply ................................................................................................................................ 20
3.2.2. Present Effective Demand......................................................................................................... 22
3.2.3. Pricing and Distribution ................................................................................................. 25
3.2. Plant Capacity and Production Program .......................................................................................... 26
3.2.1. Plant Capacity............................................................................................................................ 26
3.2.2. Production Program .................................................................................................................. 26
4. Materials and inputs ............................................................................................................................... 27
4.1. Raw materials................................................................................................................................... 27
4.2. Utilities ............................................................................................................................................. 28
5. Technology and engineering ............................................................................................................... 29
5.1. Technology ....................................................................................................................................... 29
5.1.1. Production Process........................................................................................................... 29
5.2. Engineering ...................................................................................................................................... 34
5.2.1. Machinery and Equipment ............................................................................................ 34
5.2.2. Land, Buildings and Civil Works ................................................................................. 35
5.2.3. Location ............................................................................................................................... 37
5.3. Environmental Impact Assessments of the Project ......................................................................... 37
5.4. Project implementation ................................................................................................................... 39
6. Human resource and training requirement ............................................................................................ 40

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 6.1. Human resource requirement ......................................................................................................... 40
6.2. Training requirement ....................................................................................................................... 41
7. Financial analysis ..................................................................................................................................... 42
7.1. Total Initial Investment Cost ............................................................................................................ 43
7.2. Production cost ................................................................................................................................ 44
7.3. Financial evaluation ......................................................................................................................... 45
7.4. Economic and social benefits ........................................................................................................... 47
8. Financial analyses supporting tables...................................................................................................... 48

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 KEY INFORMATION HIGHLIGHTS OF THE PROJECT

PROPOSED PROJECT Establishment Of Modern Coffee Processing roasting

,grinding and packing Plant

PROJECT AREA South western Ethiopia Oromiya Regional

StateJimma town Ginjo kebele

LAND REQUIREMENT  5000 m2 - for Sorting roasting grinding and Packing

factory

PRODUCTION CAPACITY 5000 Tone per Annum

FACILITIES WILL BE PROVIDED

 Exporting finest international quality standards
Washed and Natural /Sun-dried roasted Coffee
worldwide
 Roasted ,grounded and packed standard specialty
coffee

MARKET National and International

COST OF THE PROJECT 25 million

JOB OPPORTUNITY The project will create employment opportunities for 116
persons

VISION  To be one of the leading finest rosted coffee exporter

 To be internationally recognized coffee export firm.
 Create partnerships with coffee importers

 To establish modern coffee processing ,rosting and

grinding plants in jimma city
 export of a value-added product coffee roasting,

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 OBJECTIVES grinding and packing
 Processing & Exporting Of Ethiopian Arabica Specialty
Coffee
 To Be One Of The Leading Coffee Processors And
Exporters
 create employment opportunity for a
substantial number of persons

LONG TERM GOALS  Expand company’s technology to other food products

manufuctering such as chocolate and other finished
product

Keys to Success  Produce the finest and innovative quality product

 Creative marketing and sales strategies
 develop positive partnerships

OUR STRATEGY  Gives the highest regards to the Win-Win

opportunities
 Benefiting stakeholders in the coffee business.
 reputation based on high quality coffee and fair
price, Creating backward linkages with the
agricultural sector

PBP ( PAY BACK PERIOD) 5 year

ANALYSIS RESULT

THE PROJECT IS TECHNICALLY FEASIBLE, FINANCIALLY AS WELL AS SOCIALLY AND

ECONOMICALLY ACCEPTABLE. HENCE, THE PROJECT IS WORTH IMPLEMENTING.

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SUMMARY
This profile envisages the establishment of a plant for the production of
roasted, grounded and packed coffee with a capacity of 5000 tons per annum.
Several varieties of processed green coffee usually are blended and roasted
together to produce the tastes, aromas and flavors popular with consumers.
Grounded coffee is consumed by hotels, bars, cafeterias and households.
Although coffee is now grown in many countries around the world, Ethiopia
remains one of the chief players in the global market, by exporting
exceptionally flavorful gourmet coffees to the world. Ethiopia is reported to be
the largest coffee producer in Africa.

the present export demand for locally produced non Decaffeinated roasted and
milled coffee is estimated at 9,395 tons. The export demand for locally
produced non decaffeinated roasted and milled coffee is projected to increase
from 14,768 tons in 2020 to 21,529 tons and 31,384 tons by the years 2025
and 2030 respectively.

The main raw material for coffee processing plant is pre-cleaned green coffee
which is available locally. The product can get its market outlet through the
existing wholesale and retail network that includes department stores,
merchandise shops and supermarkets The establishment of such plant will
have a foreign exchange earning effect by exporting its product to the global
market.

The total investment cost of the project is estimated at Birr 25 million. From
the total investment cost the highest share is accounted by fixed investment
cost followed by initial working capital and pre operation cost. The project is
financially viable with an internal rate of return (IRR) of 20.98% and a net
present value (NPV) of Birr 12.29 million, discounted at 10%.The project can
create employment for 22 persons.

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The establishment of such factory will have a foreign exchange saving and
earning effect to the country by substituting the current imports and exporting
its products to the international market. The project will also create backward
linkage with the agricultural sector and forward linkage with the hotel and
tourism sector and also generates income for the Government in terms of tax
revenue and payroll tax. The project will create a conducive environment for
the rapid growth of service and trade sectors around the project site which in
turn create employment opportunity for a substantial number of persons.

To this effect, the owner of the envisioned. who has been living for long time in
this city, planned to establish modern coffee roasting, grinding and packing
plant for national and international market in Oromiya Regional State, Jimma
City, Ginjo Kebele. The promoter is very ambitious and committed to realize the
project undertaken this study to check the market, technical and financial
feasibility of this project. Hence, expect to get the necessary support from the
city administration to make the project to be operational.

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1. General background of the project

1.1. Background
The Ethiopian economy is heavily dependent on agriculture. The sector
contributes about 48 per cent of the country‘s GDP, while accounting for 90
per cent of foreign exchange earnings, 85 per cent of employment and 70 per
cent of the raw material requirements of local industries Ethiopia is a
prominent global coffee producer as well as consumer. According to the Central
Statistical Agency of Ethiopia (2015), the country produced 420 million
kilograms of coffee beans and consumed up to about 220 million kilograms
(IOC, 2016), that is, more than half of its total production. Ethiopia is the
birth place of coffee. The word ―coffee‖ is taken from the name of an
administrative region,―Kaffa‖, where coffee was discovered and where it grows
wild. According to legend, a goat herder named Kaldi noticed how frisky his
goats became after eating coffee berries. He then decided to try some Ethiopia
is not only the home of coffee but it also possesses 99.8 per cent of Arabica‘s
genetic diversity, which enables it to produce different coffee types with a vast
range of inherent characteristics that make them unique and distinctive.

The Arabica coffee that is produced by other countries is derived from about
four to five gene bases, taken from Ethiopia. The rich genetic resource pool
could be attributed to the different coffee growing agro-ecological zones and
natural factors such as rainfall, shade, altitude, climate and soil. Coffee grows
in almost all the administrative regions of Ethiopia under different conditions
ranging from the semi-savanna climatic condition of the Gambela plain (500m
a.s.l) to the continuously wet forest zone of the South Western region (2200m
a.s.l). Ethiopia‘s vast genetic resource is more precious than any other; an
example is that Arabica is 95 per centself-pollinating and in-breeding as
opposed to Robusta, which is cross-pollinating. Moreover, the huge genetic
resource pool is valuable in that it may be used to meet the need for high-yield,
disease-resistant and preferred traits such as low caffeine or caffeine-free coffee
However, little has been done to identify and make use of these valuable

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resources: much more needs to be done to adequately explore and exploit the
resources.

Coffee has economic, environmental and social significance in Ethiopia. It

accounted for an average of 51 per cent of the total value of Ethiopia‘s export
earnings during the period 2000-2005. In 2007, the share of coffee in the
export income of the country was 37 per cent. Despite a drop in share
percentage, it is still the leading foreign exchange earner. Coffee is not only the
major source of the country‘s export earnings but also the main provider of
employment opportunities. One fourth of the population is engaged in coffee
production, transportation and marketing. In addition to the economic
contribution, coffee has environmental and social significance. About 45 per
cent of coffee is produced in forest and semi-forest areas. Moreover, coffee that
grows in the backyards of the homes of small farmers, known as garden coffee,
constitutes about 50 per cent of total coffee production and plantations
growing under shade trees, account for 5 per cent of the total. Coffee
production and shade trees are linked in that coffee helps to protect the
environment and conserve valuable genetic resources. Coffee has social and
cultural benefits; it is part of Ethiopian tradition and is used in social
interaction such as get-togethers with family members, neighbors; for
celebrations, mourning and receiving guests. More than 95 per cent of the
coffee in Ethiopia is produced by smallholder farmers while the remainder
comes from large-scale private and government-owned farms.

The annual coffee production, estimated at between 300,000-330,000 tons.

Local production of coffee also exhibits a substantial growth increasing from
225,362 tons in year 2001 to 373,941 in the year 2012, registering an average
annual growth rate of 5.44%. During the period 2000-2013, the maximum
export of coffee from Ethiopia was 211,981 tons in 2010, while the minimum
was 89,220 tons in 2001; however during the period under consideration, on
average, the country was exporting about 155,785 tons of coffee per annum.
During the period under consideration (2000-2013), export of coffee has

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registered an average annual growth rate of 6.25%. In terms of value, export of
coffee has increased from Birr 2.09 billion in 2000 to Birr 11.39 billion in 2013,
registering an average annual growth rate of 20.39%. Ethiopian population is
estimated to be 90+ millions, of which coffee sustains the livelihood of 15
million people. Coffee is vital to the culture and socioeconomic life of the state.

There are a number of players involved in the coffee marketing chain. These
include the coffee producers, suppliers, the Ethiopian Coffee Purchasing
Enterprise, the Ethiopian Coffee Export Enterprise and private exporters In
2008, the Ethiopia Commodity Exchange (ECX), a trading center for Ethiopian
agricultural products such as coffee, maize, navy beans, wheat, and sesame,
was established. In the same year, the government and the ECX introduced a
new grading and distribution system for coffee in Ethiopia.

Most importantly, this forest shelters the gene pools of many important crops,
including coffee (Coffea arabica) and false cardamom (Aframomum corrorima)
[31],in addition to supporting local forest-based livelihoods, for example,
through shade coffee (i.e., coffeegrown under shade trees) and honey
production [32,33]. Coffee is a dominant export commodityaccounting for over
25% of Ethiopia‘s total foreign currency earnings and the coffee production
sectorsupports the livelihoods of over 15 million people Forest coffee
ecosystems, i.e., ―forest coffee‖and ―semi-managed forest coffee‖ production by
smallholders, mostly in south and southwest andto some extent in southeast
Ethiopia account for about 45 percent of the country‘s total coffee production.

Smallholders‘ coffee production involves the use of local knowledge and

techniques, which are often relatively biodiversity friendly). Accordingly, coffee
production in the forest coffee ecosystems, as recently demonstrated has
slowed deforestation in southwest Ethiopia [38].The economic contribution of
coffee seems to be a factor motivating the government to further expand. The
macro economic performance in the past seven years has been very positive
and the broad-based economic growth is expected to continue under GTP II.

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Although the incentive packages that are currently given seem to be adequate
the government is planning to give additional incentives for the manufacturing
sector, particularly to export oriented and agro processing projects

To this effect ,the owner plan to invest on manufacturing of COFFEE

PROCESSING industry and committed to developing in south west of Ethiopia
jimma town.

Besides, the government policies and incentives for the private sector
investment are very promising that initiate the promoter to engage in
establishing manufacturing of COFFEE PROCESSING industry

1.2. Objective of the project

 To establish coffee roasting, grinding and packing plant for

domestic and international market
 Provide an excellent service experience, anticipating the needs of the
customers and delivering the best service.
 export of a value-added product coffee roasting, grinding and packing
 Processing & Exporting Of Ethiopian Arabica Specialty Coffee
 To Be One Of The Leading Coffee Processors And Exporters
 create employment opportunity for a substantial number of persons
 Strategically position Ethiopian coffee processing industry to be
globally competitive; and
 Complement the national development agenda through export of a
value-added product.

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1.3. Project rationale
As per the analysis carried out by different institutions on the political,
economic, socio-cultural and technological developments (PEST), Ethiopia
offers a stable political and economic environment as well as security;
exceptional climate; almost complete absence of routine corruption;
continuously improving public service delivery which makes it potentially an
ideal destination for investment. The macro economic performance in the past
seven years has been very positive and the broad-based economic growth is
expected to continue under GTP II. Although the incentive packages that are
currently given seem to be adequate the government is planning to give
additional incentives for the manufacturing sector, particularly to export
oriented and agro processing projects. Priorities will be given to the
manufacturing sector in support provision in the areas of licensing, land and
finance allocation, training and the like.

The expansion of Universities as well as Technical, Vocational Education and

Training (TVET) in all parts of the country provides good opportunity in the
supply of skilled and semi-skilled technical personnel. Health service provision
and development of infrastructures such as roads, energy and communication
are also showing a rapid improvement in the country. The advancement of
science and technology in the world and the spread of same in the country will
favorably influence the smooth operation of the envisaged project. Moreover,
the strategic location of the country, which is near to the Middle East and
Europe, has an advantage in international trade.

As part of the support provided by the government to the agricultural sector,

accesses to productive inputs, such as hybrid seed and fertilizer has been
expanded. The government has also established the Ethiopian Commodity
Exchange (ECX), which is a marketing institution established for creating and
running the Ethiopian commodity market in a transparent, fair and
sustainable manner that would benefit all the 3 actors in the value chain and
the country at large. Accordingly, it can be concluded that Ethiopia is ideal for

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investment. The company plans to alter the market dynamics of coffee by
improving roasting and service standards in jimma. It operates a commercial
size roasting plant with annual potential production capacity of 300 tons.
Product and service quality is improved by bringing designs and fabric patterns
from coffee growing communities into coffee bags/cases while maintaining
international packaging standards. This created market linkages among
handicraft, hotel and tourism stakeholders.

jimma zone is the foundation of coffee Arabica and one of the best produce of
washed and unwashed coffee. Moreover it is famous in the country by
supplying quality coffee to the export market. Although those of the factories
which produce washed and unwashed forms are great in number, none is
coffee roasting, grinding and packing industry. Therefore, there is no problem,
but plenty of raw coffee supply for intended project from those of processing
industries.in order to respond to the created environment the jimma zone is
need of major , basic and feasible coffee processing industry project to be
implemented. Accordingly, a thorough assessment of the current status and
future prospect of these factors indicates that there is a progressively growing
local demand for value added coffee products.

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1.4. The significance of the project
The envisaged project deemed to add to the economic development of the
nation in general and zone and town in specific with following ways:

A. Source of Revenue
As public policy of any nation, the government collects different forms of taxes
from different business organizations and individuals. Among the different
forms of taxes, business income taxes, payroll income tax and VAT are
collected from undertaking business activities.

B. Employment opportunity
One of the problems that our country faced is unemployment. Therefore, the
current objective of the government is working on tackling the problem of
unemployment and fostering the development process either through creating
self-employment or employment in other organization. Hence, this project will
hire 116 individuals

Sources of social service

The project will create backward linkages with the agricultural sector. The
project will create a conducive environment for the rapid growth of
manufacturing sectors around the project site which in turn create
employment opportunity for a substantial number of persons.

Reasons for the expected success of the project:

• Unwavering commitment of the local investor and detailed understanding

and planning of the business;

• High acceptance and recognition of our brand and products within a

relatively short period;

• Relatively high level of expertise in coffee, especially when compared with

local investors; and Significant demand for quality coffee products in the local
market.

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1.5. Project Location
Jimma city is found in Oromia regional state at about 358 km away from Addis
Ababa /finfinne city, in the south west direction. Geographically, The city is
located at 7O 40 ‗N latitude And 36 O6‘ E longitude and the total area of land of
the city was estimated over 4,623 hectares. The town is located in ―Weina Dega
― zone; that is to say; it is found in that part of Ethiopia, which receives
moderately heavy rainfall throughout the year. The mean annual rainfall in the
town is 1450-1800mm.The temperature in the town range of 12.1 Co to 30Co
with the mean daily temperature of 19.5Co

Topographically, the Jimma area might be divided into escarpment and alluvial
plains. Elevation within the town boundary ranges from the lowest 1720
m.a.s.l. of the airfield (kitto) to the highest 2010m.a.s.l. of Jiren.As shown
below Jimma city grouped between 1500-2000m elevations that cover 0.46%
from considered area. In year 2004, the total population of the city is estimated
to reach 144,835. The number of male accounts 51% and the number of female
accounts 49%.

Jimma town is one of the oldest town in the southern western part of the
region and its strategic location and availability of major infrastructures makes
it the main market centre for coffee and cereal crop productive woredas of the
zone and surrounding areas such as Illubabor zone of oromia region and
keficho shekicho and bench maji zone of southern region and gambella region.
dairy farming in the cities which are small scale and medium scale dairy
farming now in jimma area were people‘s daily activities since the sector attract
many business men and residence. Urban Agriculture in Jimma includes
horticulture (vegetables and fruits), livestock like cattle, sheep, goats breeding
and equine for transport purpose; According to Jimma zone Central Statistical
Authority, April 2007/8 Cattle, population of 2,006,467cattle,248049
Goats,496512 Sheep 252685 Equine and, 3053792 Poultry found in the city

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There is an industrial zone in Jimma which was prepared before four years was
now partially developed for different manufacturing of building materials such
as Hollow Concrete blocks. Still there is an open space at the northern part of
this site, which can be used for expansion of similar uses in the coming
planning period. Because of geographical locations, the zone has a great
advantage for accessing the local products to the market and creates favorable
condition for the provision of the demanded commodities to the communities.

The coverage of basic infrastructure facilities are increasing dramatically in

recent years following free market policy of the Federal Democratic Republic of
Ethiopia‘s (FDRE) in general and Regional Government of Oromia in
particular.so that The proposed location of dairy processing factory will be
jimma towns.

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2. Product Description and Application
Coffee is a common name for any of a genus of trees of the madder family, and
also for their seeds (beans) and for the beverage brewed from them.The
Arabicas and Rubastas are the two major types of commercial coffee.
Chemicals extracted from expertly processed and roasted coffee by hot water
classified as non-volatile are caffeine, trigonelline, chlorogenic acid, phenolic
acids, amino acids, aldehydes, ketones, esters, amines, and mercaptanes.
Undoubtedly the popularity of this beverage is, at least to some extent, related
to its stimulant effects. Average caffeine contents per cup of brewed coffee is
110 mg. Caffeine is a mild psycho - stimulant that has been called the most
widely used psychoactive substance on earth.

Several varieties of processed green coffee usually are blended and roasted
together to produce the tastes, aromas and flavors popular with consumers.
Grounded coffee is consumed by hotels, bars, cafeterias and households.
Roasted and packed coffee is a resource based project that will substitute
import and have an export potential. Green Decaffeinated Coffee The caffeine is
extracted and removed while the coffee is in green raw form by using water
and/or chemicals to reduce the caffeine content to as low as 0.1% to 0.2%.
Ethiopia is ranked fifth with an average share of 4%. Global total export of
coffee (in all forms), during the period 2004--2013, has increased from 5.7
million tons valued at 9.17 billion USD to 8.18 million tons valued at 28.61
billion USD, registering an average annual growth rate of about 4.15% and
15.27% in terms of volume and value, respectively. During the period 2004--
2013, Brazil followed by Vietnam, Colombia and Germany were the leading
exporters of coffee

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Roasted Coffee

Green Coffee is roasted at by action of heat (roasting) to develop characteristic

flavor and aroma and packed and supplied to market.

Roasted Ground Coffee

The Roasted Ground Coffee product is prepared by grinding and packing

roasted coffee for house hold consumption as well as for commercial centres
like hotels and restaurants.

Liquid Coffee Extract

The Liquid Coffee Concentrate extracted from regular or decaffeinated coffee for
house hold consumption or industrial consumption purpose.

Instant Coffee

Instant Coffee is produced in two forms (spray dried agglomerated and freeze dried) based on the
type of production processes employed. The instant coffee product dissolves instantly in hot
water during consumption.

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3. Market study and plant capacity

3.1. Market study

The consumers of processed coffee products are local coffee consumers (mainly
the urban dwellers), importers, and food and beverage industries operating in
the country and abroad (chocolate, candies, confectioneries).Ethiopian coffee is
exported to over 50 countries every year. The largest importer country of
Ethiopian coffee is Germany (about 30 % of the total Ethiopian coffee export)
followed by Saudi Arabia (about 15 %), USA (6 - 10 %) and Belgium , Japan,
France, Italy, and Sudan (4-6 % each). Over 80 % of the total volume of coffee
is exported to these 8 countries.

3.1.1. Local Market

Overview of the Performance of the Local Coffee Sub Sector

During the period 2004—2013, the land area cropped by coffee shows a
significant growth; increasing from 232,439 hectare to 528,751 hectares,
registering an average annual growth rate of 10.17%. Local production of coffee
also exhibits a substantial growth increasing from 225,362 tons in year 2001
to 373,941 in the year 2012, registering an average annual growth rate of
5.44%. During the period 2000-2013, the maximum export of coffee from
Ethiopia was 211,981 tons in 2010, while the minimum was 89,220 tons in
2001; however during the period under consideration, on average, the country
was exporting about 155,785 tons of coffee per annum.

During the period under consideration (2000-2013), export of coffee has

registered an average annual growth rate of 6.25%. In terms of value, export of
coffee has increased from Birr 2.09 billion in 2000 to Birr 11.39 billion in 2013,
registering an average annual growth rate of 20.39%. Although coffee is still
the dominant foreign exchange earner to the Ethiopian economy, considering
the unique natural endowment and the special varieties of coffee produced in
the country, which are highly valued by importing countries, it can be
concluded that the country is not benefiting from its coffee resource potential.

19
For example, during the period 2009-2013, the average unit value of coffee
exported by Switzerland is higher by nearly 10 fold as compared to the average
unit value of coffee exported from Ethiopia. In fact, West European countries
are not producers of coffee but they have specialized in import of the green
coffee from developing countries where the resource is available and then
processing the product (value adding) and re-exporting. Accordingly, in order to
fully exploit the country‗s coffee resource potential, developing local value
addition capability is indispensable.

3.2. Past Supply and present demand

3.2.1. Past Supply
The local demand for roasted and milled coffee is supplied through local
production and import. On the other hand the local market for decaffeinated
coffee; extracts and concentrates of coffee and soluble or instant coffee is
largely met through import. The finding on the trend in the past supply of the
products under consideration is summarized below

1.Decaffeinated Green Coffee

Ethiopia produces a small amount of decaffeinated green coffee; which is

exclusively targeted at export market. On the other hand, the country imports
insignificant amount of the product. During the period 2002—2007, the
average annual import was about 1.47 tons valued at Birr 29,997. However,
during the recent six years (2008--2013), import of decaffeinated green coffee
has increased to7.15 tons in average per annum; valued at Birr 794,335.

2) Roasted and Milled Coffee

Roasted and Milled Coffee not Decaffeinated: The apparent consumption or

total supply of not decaffeinated, roasted and milled coffee consists of local
production plus import minus export. Local production of not decaffeinated,
roasted and milled coffee, excluding year 2006, which is exceptionally high,
exhibits two distinct trends. During 2000--2008 local production, except for

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years 2003 and 2004, has shown a year to year growth increasing from only 28
tons in 2000 to 2,767 tons in 2008. Beginning from 2009, local production
exhibits a declining trend. However, the volume of local production in the
recent seven years (2007--2013) is much higher than the volume of production
during the initial years (2000-2005). During the period 2000--2005, the
average annual local production was 237 tons, which has increased to an
average annual of 1,746 tons during the period 2007--2013. Hence, between
the two periods local production has increased by more than seven folds.
Import of not decaffeinated, roasted and milled coffee fluctuates from year to
year without any noticeable trend. Import ranges from 1.78 tons in 2000 to
94.45 tons in 2007. Nevertheless, when average import of the product during
the initial seven years (2000--2006) is compared with

the average import of the subsequently seven years a growth in import can be
noticed. The average annual import during the initial period was 5.43 tons,
which has increased to an annual average of 40.13 tons during the period
2007--2013. Since the great majority of the local demand for not decaffeinated,
roasted and milled coffee is met through local production (accounting on
average for 98.93% of the total supply during the period 2000--2013, total
supply or apparent consumption of the product exhibits similar trend to local
production, i.e. an increasing and decreasing trend during the periods 2000--
2008 and 2009--2013, respectively, in terms of year to year growth but yet a
much higher volume of supply during the recent period as compared to the
initial period. Decaffeinated, Roasted and Milled Coffee: The country imports a
small quantity of decaffeinated, roasted and milled coffee. During the period
2000—2013, the maximum import was 28.29 tons in 2010 valued at Birr 1.83
million, while the minimum was 0.01 tons 6 in 2004 valued at Birr 802. During
the period 2000--2013 on average, the country has imported 4.03 tons of
decaffeinated, roasted and milled coffee valued at Birr 242,555. However, if
only the recent four years (2010--2013) are considered the average annual
import increased to 10.06 tons.

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3) Instant Coffee

During the period 2000--2013 on average, the country has imported 6.17 tons
of instant coffee valued at Birr 324,573 annually. Import of the product
fluctuates from year to year, however, a general growth can be observed. For
example, if only the recent five years (2009--2013) are considered, the average
annual import will increases to 10.68 tons and Birr 744,918 in terms of volume
and value, respectively.

Trend in Factors that Affect the Local Demand for the Products under
Consideration

 The variables that are essential in determining the magnitude and trend
of demand for the product under consideration are:
 Population size, population growth rate and urbanization
 Economic growth of the country in general and growth in disposable
income of the population; and Number of tourist visiting the country
development level of hotel industry

Accordingly, a thorough assessment of the current status and future prospect

of these factors indicates that there is a progressively growing local demand for
value added coffee products.

3.2.2. Present Effective Demand

Urbanization and income are found to be the major determinants of the future
demand for value added coffee products. Hence, a growth rate of 5%, which is
slightly higher than the urban population growth rate and much lower than
income growth rate, is taken to forecast the future demand. The domestic
demand for roasted coffee depends on level of income and population growth
rates. Moreover, the product‘s superior convenience will have a positive effect
on the level of demand. Since the product is high valued type, major
consumers are expected to be urban dwellers and those prosperous among the

22
rural society. However, it has been assumed for this purpose that the urban
residents will be major target consumers of the product. According to CSA
(2011) the urban population is growing at more than 4% per annum. The
country‘s economy is growing at 11%, the population and income effects are
also similar. With such understanding 4% is used to project demand growth.
Domestic production is expected to remain at year 2012 level (2,153 tons).
Export is forecasted to grow by its average growth rate of the last four years

DEMAND PROJECTION FOR ROASTED COFFEE (TONS)

a) Trend in Global Import and Export

During the period 2004—2013, global export of roasted and milled coffee
exhibits a consistent year to year growth, increasing from 473,861 tons valued
at USD 2 billion to 909,072 tons valued at USD 9.26 billion, registering an

23
average annual growth rate of 7.60% and 19.25% in terms of volume and
value, respectively. From the total global export of roasted and milled coffee, on
average, the great majority, i.e. 95.06% and 93.37% in terms of volume and
value, respectively is accounted by non-decaffeinated roasted and milled coffee.

b) Present and Projected Global Demand

The present global demand for non-decaffeinated roasted and milled coffee is
estimated at 939,462 tons. The global demand for non-decaffeinated roasted
and milled coffee is projected to increase from 1.47 million tons in 2020 to 2.15
million tons and 3.13 million tons by the years 2025 and 2030, respectively.

c) Estimated Market Share for Locally Produced Value Added Coffee

Products

the present export demand for locally produced non Decaffeinated roasted and
milled coffee is estimated at 9,395 tons. The export demand for locally
produced non decaffeinated roasted and milled coffee is projected to increase
from 14,768 tons in 2020 to 21,529 tons and 31,384 tons by the years 2025
and 2030 respectively.

d) Total Projected Demand (Local Plus Export)

The total demand for locally produced non decaffeinated roasted and milled
coffee is projected to increase from 13,256 tons in 2015 to 18,758 tons, 26,621
tons and 37,883 tons by the years 2020, 2025 and 2030, respectively

24
Marketing Mix

Product quality is one of the basic and most important marketing mixes that
affect the success of a product. The quality of value added coffee products is
mainly dependent on the quality of the raw material used. Accordingly, in order
to insure the quality of the incoming raw material the envisaged project needs
to set up an effective raw material quality control mechanism.

3.2.3. Pricing and Distribution

The market price for export quality roasted coffee on average is Birr 190 /kg.
Hence, allowing a 20% margin for distributors and retailers, selling price for
the project is proposed to be Birr 158 /kg. As to its distribution, it can be
realized through whole sale networks and retail outlets such as supermarkets
and shops.

25
3.2. Plant Capacity and Production Program

3.2.1. Plant Capacity

Based on the outcome of the market study and considering the minimum
economic scale of production, the envisaged plant will have a capacity of 5000
tons of roasted, ground and packed coffee per annum. This capacity will be
attained by working a single shift of 8 hours per day and 300 working days per
year.

3.2.2. Production Program

The Proposed production program the plant is to start production at 80% of the
production program during the first year of production, increase it to 90%
during the second year and finally reach 100% at the third year of operation of
the plantWith an assumption that enough time during the initial stage will be
required for market penetration and technical skill development, are shown in
Table

ANNUAL PRODUCTION PROGRAM

26
4. Materials and inputs

4.1. Raw materials

The principal raw material required for the envisaged plant is clean green
coffee. The plant receives pre-cleaned green coffee from cooperatives of primary
producers. The green coffee beans, upon roasting process, lose weight due to
evaporation of water. The extreme limits of the weight loss termed as ―a loss in
the fire‖ are between 14 and 23% of the initial weight of coffee beans.
Elimination of the silver skin of coffee beans which amounts from 0.2% to
0.4% and the release of certain volatile elements also occurs during roasting.
Taking the above mentioned weight loss into account, the annual requirement
for green coffee at 100 per cent capacity utilization rate is estimated to be 100
tons + (0.22 x 100 tons) = 122 tons. To attain the optimum price and taste for
the ground coffee, different types of coffee from different areas will be mixed.
The pre-cleaned coffee is processed in to value added products to be exported
and consumed locally The auxiliary materials required by the plant are
chemicals used for coffee decaffeination process and packaging materials. The
other inputs of the plant are electricity, water and lubricant oils. he packing
materials to be used by the envisaged plant are paper bag, corrugated paper
box with carton panel, and gumming paper. All these auxiliary materials can
be locally available.

The proposed package sizes of printed paper bag for packing of roasted and
ground coffee are 500 gm, 1,000 gm and 1,500 gm which are planned to
constitute 30%, 60% and 10% of the total roasted and ground coffee,
respectively. The annual requirement of the envisaged plant for raw and
auxiliary materials at full capacity operation and the corresponding cost
estimates are given in Table 4.1.

27
ANNUAL RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST

4.2. Utilities
Electric power and water are the only power and utilities required for the
envisaged plant. The annual requirement for power and utilities at full capacity
production of the plant and the total estimated costs are shown in Table 4.2.

ANNUAL UTILITIES REQUIREMENT AND ESTIMATED COST

28
5. Technology and engineering

5.1. Technology

5.1.1. Production Process

The main processing steps in the manufacture of roasted ground coffee are
blending, roasting, grinding and packing. Green coffee is cleaned of string,
lint, dust, hulls and other foreign matter. Coffee processing involves three
distinct operations, viz roasting, grinding and packing. Clean coffee,
prior to roasting is blended in desired proportions. The aromatic qualities
of coffee only become apparent once the beans have been exposed to high
temperatures during pyrolysis or roasting. Experts place the roasting zone
between 180o C and 240oC the optimum temperature being between
210oC and 230 oC. Above this temperature, over-roasting begins. In general,
four principal groups of reactions occur during roasting: dehydration
(deprive of moisture), hydrolysis (breaking down of water molecules in
hydrogen and oxygen elements), desmolysis and catalysis (for aiding the
speeding up of chemical process).

The roasting process normally lasts for between 12 and 15 minutes. In slow
roasting techniques, it requires about 25 minutes. While roasting gives
coffee its taste and aroma, it also changes the bean in certain ways. The
beans lose weight due to evaporation of water from the green coffee. About
0.2-0.4 percent silver skin is also eliminated due to roasting. Roasting
induces the endosperm to increasing volume due to the formation and
expansion of gas between 180oC and 220oC.This is manifested in a
volumetric increase of about 50 to 80 percent, the extremes being
between 30 and 100 percent. The bean becomes porous and crumbles
when pressure is applied.The minerals in coffee do not change noticeably
during roasting , but their relative content increases when the water and
volatile organic components disappear.

29
When the desired colour is reached, the coffee is discharged into the
cooling bin where it is cooled upto room temperature. The major post-
roasting operations comprise sorting, coating or glazing, blending, packing
and beverage preparing. The roasted coffee is sometimes sorted to eliminate
beans that are pale (too light) or charred (too dark). Coffee beans are blended
after roasting if there is too great a variation in type. Roasted coffees rapidly
lose their flavor and aroma. In order to avoid this, sufficiently airtight
packaging should be used which can preserve the qualities of the coffee
for a longer period of time. Additional operations associated with processing
green coffee beans include decaffeination and instant (soluble) coffee
production. Decaffeination is the process of extracting caffeine from green
coffee beans prior to roasting.

The most common decaffeination process used in the United States is

supercritical carbon dioxide (CO2) extraction. In this process, moistened green
coffee beans are contacted with large quantities of supercritical CO2 (CO2
maintained at a pressure of about4,000 pounds per square inch and
temperatures between 90° and 100°C [194° and 212°F]), which removes about
97 percent of the caffeine from the beans. The caffeine is then recovered from
theCO2, typically using an activated carbon adsorption system. Another
commonly used method is solvent extraction, typically using oil (extracted from
roasted coffee) or ethyl acetate as a solvent. In this process, solvent is added to
moistened green coffee beans to extract most of the caffeine from the beans.
After the beans are removed from the solvent, they are steam-stripped to
remove any residual solvent. The caffeine is then recovered from the solvent,
and the solvent is re-used. Water extraction is also used for decaffeination, but
little information on this process is available. Decaffeinated coffee

Beans have a residual caffeine content of about 0.1 percent on a dry basis. Not
all facilities have decaffeination operations, and decaffeinated green coffee
beans are purchased by many facilities that produce decaffeinated coffee.

30
Roasting: Coffee from different varieties or sources is usually blended before
or after roasting in order to achieve good taste coffee as well as low cost
production. Roasting by hot combustion gases in roasting cylinders requires 8-
15 minutes. The bean charge absorbs heat at a fairly uniform rate and most
moisture is removed during the first two-thirds of this period. As the
temperature of the coffee increases rapidly during the last few minutes, the
beans swell and unfold with a noticeable cracking sound, like that of popping
corn, indicating a reaction change from endothermic to exothermic. This stage
is known as development of the roast. The final bean temperature, 200-220ºc,
is determined by the blend, variety, and flavor development desire. A water or
air quench terminates the roasting reaction. Most, but not all, of any added
water is then evaporated. The bean temperature, correlated to the color of
ground coffee measured by a photometric reflectance instrument, determines
the quench end point of a roast. At the final bean temperature, the firing shuts
down automatically, followed by water spraying for a timed period and finally,
discharge of the coffee.

Air must be circulated through the beans to remove excess heat before the
finished and quenched roasted coffee is conveyed to storage bins. Residual
foreign matter such as stones and tramp iron, which may have passed through
the initial green coffee cleaning operation, must be removed before grinding.
This is accomplished by an air lift adjusted to such a high velocity that the
roasted coffee beans are carried over into bins above the grinders, and heavier
impurities left behind. The coffee beans flow by gravity to mills where they are
ground to the desired particle size.

31
Grinding: Roasted coffee beans are ground to improve the extraction
efficiency in the preparation of the beverage. Particle size distributions ranging
from about 1100µm average (very coarse) to about 500µm average (very fine)
are tailored by the manufacturer to the various kinds of coffee makers used in
households, hotels, restaurants and institutions. Coffee is ground in mills that
use multiple steel cutting rolls to produce the most desirable uniform particle
size distribution. After passing through cracking rolls, the broken beans are fed
between two or more rolls, one of which is cut or scored longitudinally, the
other, circumferentially. The paired rolls operate at differential speeds to cut,
rather than crush, the coffee particles. A second pair of more finely scored
rolls, installed below the main grinding rolls and running at higher speeds, is
used for finer grinds.

Packaging: - After roasting and grinding, the coffee is conveyed, usually by

gravity, to weighing and filling machines that achieve the proper fill by tapping
or vibrating. The ground coffee is vacuum packed in flexible paper bag and
placed in a paperboard carton that helps shape the bag into a hard brick form
during the vacuum process. The carton also protects the package from physical
damage during handling and transportation. This type of package provides a
barrier to moisture and oxygen.

32
Typical coffee roasting operation

33
5.2. Engineering

5.2.1. Machinery and Equipment

The major technology and machinery required for the envisaged plant is coffee
pre-cleaning and storage, coffee roasting and grinding, coffee extraction and
instant coffee plant and utility equipment. The The plant machinery and
equipment required for the envisaged plant comprises coffee roaster, mixer,
grinder, and automatic packing machine, and screw and goose type conveyor.
List of machinery and equipment to be acquired for the project and the
estimated costs are given in Table 5.1.

LIST OF MACHINERY AND EQUIPMENT AND ESTIMATED COST (SETS)

34
5.2.2. Land, Buildings and Civil Works
The total size of the land required for the processing plant is determined after
the arrangement of all the building blocks & facilities providing enough space
between them, space for circulation /vehicular & humans, space for
landscaping and gardening, space for loading unloading, disposal etc.
Accordingly, the land requirement of the project is estimated to be 5000 m2.
The total area of land required for the envisaged project is 5000 m2 . The
construction cost of buildings and civil works at a rate of Birr 4,500 per square
meter is estimated at Birr 12.25 million.

According to the Federal Legislation on the Lease Holding of Urban Land

(Proclamation No 721/2004) in principle, urban land permit by lease is on
auction or negotiation basis, however, the time and condition of applying the
proclamation shall be determined by the concerned regional or city
government depending on the level of development. The legislation has also set
the maximum on lease period and the payment of lease prices. The lease period
ranges from 99 years for education, cultural research health, sport, NGO ,
religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the
towns grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges

from 5% to 10%.The lease price is payable after the grace period annually. For
those that pay the entire amount of the lease will receive 0.5% discount from
the total lease value and those that pay in installments will be charged interest
based on the prevailing interest rate of banks. Moreover, based on the type of
investment, two to seven years grace period shall also be provided. However,
the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to
issue regulations on the exact terms based on the development level of each
region. the City‘s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the

35
manufacturing sector, industrial zone preparation is one of the strategic
intervention measures adopted by the City Administration. City Administration
has recently adopted a new land lease floor price for plots in the city. The new
prices will be used as a benchmark for plots that are going to be auctioned by
the city government or transferred under the new ―Urban Lands Lease Holding
Proclamation.‖

The new regulation classified the city into three zones. The first Zone is Central
Market District Zone, which is classified in five levels and the floor land lease
price ranges from Birr 1,686 to Birr 894 per m2

. The rate for Central Market District Zone will be applicable in most areas of
the city that are considered to be main business areas that entertain high level
of business activities

INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

For the purpose of this project profile the average i.e. five years grace period, 28
years payment completion period and 10% down payment is used. The land
lease period for industry is 60 years. Accordingly, the total land lease cost at a
rate of Birr 266 per m2

is estimated at Birr 239,400 of which 10% or Birr 23,940 will be paid in

advance. The remaining Birr 215,460 will be paid in equal installments with in
28 years i.e. Birr 7,695 annually.

36
5.2.3. Location
Location of the envisaged Integrated Coffee Processing Plant is selected based
on a two stage location and site selection procedures. The first stage involved
identifying potential project locations, and prioritizing and selection of
appropriate one based on critical project selection criteria. The project location
determining factors considered in the study are supply of raw materials and
inputs, access to market, availability of skilled and unskilled labor,
infrastructure such as road, electricity and telephone line, availabilities of
social amenities. Project will Be Implemented In South West Ethiopia, Oromia
Region,J imma Town in Ginjo kebele for establishment of the integrated coffee
processing plant project.

5.3. Environmental Impact Assessments of the Project

The processing industries exist in our environment and are the main
generators of wastes. Since the existing environment within which they operate
is the only one we have, and shared by both the consumers, and operators of
other sectors of the economy, there is the need therefore, to ensure the
preservation of the environment in as natural and as ecologically balanced a
state as possible for the use of all. This must and should be made to be the
motivating factor during the design, construction and operation of all
industrial set up. Industrial waste is a major source of environmental pollution.
Environmental Auditing is a management tool that systematically, periodically
and objectively reviews performance of existing projects, organizations,
management and equipment with the aim to safeguard the
environmentEnvironmental management involves the implementation of
environmental protection and mitigation measures and monitoring of
significant environmental impacts.

Environmental protection measures are taken to (i) mitigate environmental

impacts, (ii) provide in-kind compensation for lost environmental resources, or
(iii) enhance environmental resources. These measures are usually set out in
an EMP, which covers all phases of the project and outlines mitigation and

37
other measures that will be undertaken to ensure compliance with
environmental regulations and reduce or eliminate adverse impacts. The EMP
will also cover a proposal for recommending the proposed project to use goods
and products that are environmentally friendlyA major concern of the Republic
of Rwanda is sustainable economic development. There has been a concThe
government in recognition of the need to protect the environment from adverse
impact of developmental activities requires the conduct of EIA of projects that
are likely to have significant effect on the environment before implementation.
The development of EIA guidelines is therefore a response to Government and
public concern for improvement in project management to ensure a clean and
healthy environment. exerted effort to improve the quality of the environment
and enhance economic well-being EIA is a tool for decision-makers to identify
potential environmental impacts of proposed projects, to evaluate alternative
approaches, and to design and incorporate appropriate prevention, mitigation,
management and monitoring measures. For Agro-processing projects factors
like the category of waste, the size of the population to be served by the project
or impacted by the project and project location are the critical information
required to determine whether an EIA is necessary.

biodegradable and recyclable packaging materials for its coffee products. The
paper cups and coffee boxes are made of recyclable carton, and the jute sacks
and pallets used in bean storage are reused. We use only biodegradable
cleaning agents in disinfecting our coffee machines and stations. Our coffee
product distribution, especially transport and logistics, is programmed to
achieve efficiency and use of limited resources. t is important to see
environmental assessment as part of the overall project planning and
assessment process. The full integration of environmental assessment with
economic, financial, technical, and social aspects and will help ensure all
aspects of a project are assessed, and increase the likelihood of it being
sustainable and able to contribute to the overall sustainable development

38
5.4. Project implementation
The project‘s implementation is expected to take 24 months. The major
activities include Bank loan processing if any, construction of the building,
cleaning the area around the building, Procurement of equipments and start
rendering services. The time schedule for the above matured major activities is
presented below:

Table: project Implementation schedule

SN Activities Date

1 Land processing February , 2020

2 approval March , 2020

3 Site Development April – May , 2020

4 Building and construction work June - November 2020

5 Preparation for service December, 2021

6 Service execution December , 2021

39
6. Human resource and training requirement

6.1. Human resource requirement

The organizational structure of the envisaged plant is constructed considering
the extent of the industry. The plant structure follows the functional
organizational structure approach to achieve operational efficiencies within a
group. The plant has four functional departments and two services. The
functional departments are namely: production and technique departments,
commercial department, finance department and human resource and
administration departments. The two services are Planning and IT services and
Internal Audit service. The coffee roasting, grinding and packing plant will
create job opportunities for 116 persons. The project will have 116 employees.
The human resource requirement and the estimated annual labor cost,
including fringe benefits, are given in Table 6.1

40
 HUMAN RESOURCE REQUIREMENT AND LABOR COST

6.2. Training requirement

The quality controller, production supervisor, and 3 operators should be given
on-the-job Training for duration of two weeks by the advanced expert of the
machinery supplier. The total training cost is estimated at Birr 140,000.

41
7. Financial analysis
The financial analysis of the roasted, grounded and packed coffee project is
based on the datan Presented in the previous chapters and the following
assumptions:-

Construction period 1 year

Source of finance 30 % equity

Tax holidays 3 years

Bank interest 10%

Discount cash flow 10%

Accounts receivable 30 days

Raw material local 30 days

Raw material imported 120 days

Work in progress 1 day

Finished products 30 days

Cash in hand 5 days

Accounts payable 30 days

Repair and maintenance 5% of machinery cost

42
7.1. Total Initial Investment Cost
The total investment cost of the project including working capital is estimated
at Birr 25 million (See Table 7.1). From the total investment cost the highest
share (Birr 5.24 million or 51.77%) is accounted by fixed investment cost
followed by initial working capital (Birr 3.87 million or 38.23%) and pre
operation cost (Birr 1.01 million or 10.01%). From the total investment cost
Birr 818.40 thousand or 8.07% is required in foreign currency. #

Table 7.1.Initial Investment Cost (‘000 Birr)

Sr. Local Total
Cost Items
No. Cost Cost
1No Fixed investment
1.1 Land Lease 23.94 23.94
1.1 Building and civil work 5,000.00 5,000.00
1.3 Machinery and equipment 9,000.00 9,000.00
1.4 Vehicles 4,500.00 4,500.00
1.5 Office furniture and equip 450.00 450
equipment
Sub- total 18,950 18,950
2 Pre operating cost *
2.1 Pre operating cost 451.15 451.15
Sub -total 19,401.15 19,401.15

3 Working capital** 5,598.85 5,598.85

Grand Total 25,000,000 23,000,000

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

43
7.2. Production cost
The annual production cost at full operation capacity is estimated at Birr 16.55
million (see Table 7.2). The cost of raw material account for 86.64% of the
production cost. The other Major components of the production cost are
depreciation, financial cost and marketing and distribution, which account for
4.29%, 3.85% and 1.81% respectively. The remaining 3.41 % is the share of
labor, utility, repair and maintenance, labor overhead and administration cost.
For detail production cost see Appendix 7.A.2.
Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY (year three)

44
7.3. 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 ranges from
Birr 1.07 million to Birr 1.87 million during the life of the project. Moreover,
at the end of the project life the accumulated net cash flow amounts to Birr
35.60 million. For profit and loss statement and cash flow projection see
Appendix 7.A.3 and 7.A.4, respectively.
2. Ratios
In financial analysis financial ratios and efficiency ratios are used as an
index or yardstick for evaluating the financial position of a firm. Using the
year-end balance sheet figures and other relevant data, the most important
ratios such as return on sales which is computed by dividing net income by
revenue, return on assets (operating income divided by assets), return on
equity (net profit divided by equity) and return on total investment (net
profit plus interest divided by total investment) has been carried out over
the period of the project life and all the results are found to be satisfactory.
3. Break-even Analysis
The break-even analysis establishes a relationship between operation costs
and revenues. It indicates the level at which costs and revenue are in
equilibrium. To this end, the break-even point for capacity utilization and
sales value estimated by using income statement projection
are computed as followed.
Break Even Sales Value = Fixed Cost + Financial Cost = Birr
5,885,476
Variable Margin ratio (%)
Break Even Capacity utilization = Break even Sales Value X 100 = 32%
Sales revenue

45
 4. Pay-back Period
The pay-back period, also called pay – off period is defined as the period
required for recovering the original investment outlay through the accumulated
net cash flows earned by the project. Accordingly, based on the projected cash
flow it is estimated that the project‘s initial investment will be fully recovered
within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return
rate that can be earned on the invested capital, i.e., the yield on the
investment. Put another way, the internal rate of return for an investment is
the discount rate that makes the net present value of the investment's income
stream total to zero. It is an indicator of the efficiency or quality of an
investment. A project is a good investment proposition if its IRR is greater than
the rate of return that could be earned by alternate investments or putting the
money in a bank account. Accordingly, the IRR of this project is computed to
be 20.98% indicating the viability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present (discounted) value of a
time series of cash flows. NPV aggregates cash flows that occur during different
periods of time during the life of a project in to a common measuring unit i.e.
present value. It is a standard method for using the time value of money to
appraise long-term projects. NPV is an indicator of how much value an
investment or project adds to the capital invested. In principle, a project is
accepted if the NPV is non-negative. Accordingly, the net present value of the
project at 10% discount rate is found to be Birr 12.29 million which is
acceptable. For detail discounted cash flow see Appendix 7.A.5.

46
7.4. Economic and social benefits
The project can create employment for 116 persons. The project will generate
Birr 4.63 million in terms of tax revenue. The establishment of such factory
will have a foreign exchange saving and earning effect to the country by
substituting the current imports and exporting its products to the international
market. The project will also create backward linkage with the agricultural
sector and also generates income for the Government in terms of payroll tax.

47
8. Financial analyses supporting tables
Appendix 7.A

Appendix 7.A.1
Net working capital (in 000 Birr)

48
 Appendix 7.A.2
PRODUCTION COST ( in 000 Birr)

49
 Appendix 7.A.3
INCOME STATEMENT (in 000 Birr)

50
 Appendix 7.A.4

Cash flow for financial management (in 000 Birr)

51
 Appendix 7.A.5

DISCOUNTED CASH FLOW (in 000 Birr)

52