85.

PROFILE ON ENVELOPS , LABELS AND

BADGES OF PAPER
 85-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 85-3

II. PRODUCT DESCRIPTION & APPLICATION 85-3

III. MARKET STUDY AND PLANT CAPACITY 85-4

A. MARKET STUDY 85-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 85-8

IV. MATERIALS AND INPUTS 85-9

A. RAW MATERIALS 85-9
B. UTILITIES 85-9

V. TECHNOLOGY & ENGINEERING 85-10

A. TECHNOLOGY 85-10
B. ENGINEERING 85-12

VI. MANPOWER & TRAINING REQUIREMENT 85-15

A. MANPOWER REQUIREMENT 85-15
B. TRAINING REQUIREMENT 85-16

VII. FINANCIAL ANLYSIS 85-17

A. TOTAL INITIAL INVESTMENT COST 85-17
B. PRODUCTION COST 85-18
C. FINANCIAL EVALUATION 85-19
D. ECONOMIC BENEFITS 85-21
 85-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of paper envelopes
and badges and labels with a capacity of 200 tonnes of envelopes and 300 tonnes of
labels and badges per annum.

The major raw materials required are sheet paper of different qualities and glue which
have to be imported.

The present demand for the proposed product is estimated at 288 tonnes for envelopes
and 428 tonnes for labels and badges per annum. The demand is expected to reach at
567 tonnes for envelopes and 842 tonnes for labels and badges by the year 2018.

The total investment requirement is estimated at Birr 11.96 million, out of which Birr
5.50 million is required for plant and machinery. The plant will create employment
opportunities for 27 persons.

The project is financially viable with an internal rate of return (IRR) of 13.40 % and a net
present value (NPV) of Birr 1.61 million, discounted at 8.5%.

The establishment of such factory will have a foreign exchange saving effect to the
country by substituting the current imports. It has also a forward linkage effect with the
manufacturing sector.

II. PRODUCT DESCRIPTION AND APPLICATION

Paper envelops are stationery articles that are used to enfold letters (documents) in
modern private, office, etc written communications. They are items of daily consumption
in homes and offices.
 85-4

Labels are pieces of paper attached to products to give instructions about it or identify it
while badges are characteristic or identifying mark on a particular brand, quality or type
of person. Labels may be required on products to provide warnings or to enable
consumers compare similar products.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The demand for envelopes as well as labels and badges of paper are met from imports.
Therefore, the data obtained on imports from the Ethiopian Customers Authority is
presented in Table 3.1 to indicate the unsatisfied demand

Table 3.1
IMPORT OF ENVELOPES AND LABELS & BADGES OF PAPER(KG)

Year Envelopes of Labels & Badges

Paper of Paper
1998 33,468 280,037
1999 131,757 250,732
2000 233,004 120,601
2001 227,257 136,939
2002 122,257 521,714
2003 137,538 471,926
2004 187,726 210,964
2005 201,781 466,696
2006 375,424 383,863
Source:- Ethiopian Customs Authority.
 85-5

Table 3.1. generally reveals that import of envelopes has been increasing during the
past nine years although fluctuations occur in some years. When the data set is analyzed
in to three group periods the following results are observed. During the period 1998-
2000, the yearly average level of import was 133,076 kg. During the period 2001-2003,
the yearly average level of import has increased to 162,350 kg. The increase in import
during the period 2001-2003 as compared to the period 1998-2000 is about 22%. During
the recent three years, i.e., 2004-2006, imported quantity has grown to 254,977 kg, which
is higher than by about 57% as compared to the period 2001-2003.

Considering the fluctuations observed in some years, the average of the recent two years
import is assumed to reflect the current demand. Accordingly, current unsatisfied
demand for envelopes of paper is estimated at 288,602 kg.

With regard to labels and badges, of paper the import data is highly erratic. For instance,
imported quantity during 1998 has been 280,037 kg and declined to 250,732 kg, 120,60
kg and 136,037 kg by the year 1999, year 2000 and year 2001, respectively. During the
following two years, i.e., 2002 and 2003, the imported quantity increased to 521,714 kg
and 471,926 kg. respectively. This is almost three times higher as compared to the
annual import figures of year 2000 and 2001. However, the imported quantity during
2004 has dropped 210,964 kg, which is less than half of the previous year.

The fluctuations has also continued in the last two years of the data set. After increasing
by more than two times in 2005, i.e., 466,696 kg, the import figure has again declined to
383,863 by the year 2006.

In the absence of a trend in the import data for labels and badges of paper, the following
assumption are used to determine the current (2008) demand.

The three years (2004-2006) average level of import has been taken as the
effective demand for the year 2006. The recent three years average is
found to be 354 tonnes.
 85-6

Demand is assumed to grow by 10% per annum in the past two years as
the product is mainly associated with the growth of manufactured articles.

Based on the above assumptions, the current effective demand for labels and badges of
paper is estimated at 428 tonnes.

2. Projected Demand

The demand for envelopes will increase with literacy rate of the population, expansion of
various governmental and non governmental organizations, financial institution and other
service sectors. The literacy rate of the country is growing very fast and a number of
organizations and private offices are on the rise due to social and economic development.
The PASDEP document indicates that GDP will grow from 7 to 10% during the period
2005/06-2009/10.

Demand for labels and badges of paper is mainly related with the growth and
development of the manufacturing sector. As population grows and income rises, the
demand for manufactured goods will also increase. This inturn brings increase of
demand for labels and badges by the manufacturing sector. The target set for the
industrial sector during the period of PASDEP is to register an average annual growth
rate of 11.5%.

Considering the PASDEP overall GDP growth and the target set for the industrial sector,
demand for envelopes and labels and badges of paper is conservatively forecasted to
grow by 7% per annum. The forecasted unsatisfied demand for the two products is
shown in Table 3.2.
 85-7

Table 3.2.
PROJECTED UNSATISFIED DEMAND FOR ENVELOPES
AND LABELS AND BADGES OF PAPER (TONNES)

Year Envelopes Labels& Badges

2009 308.8 458.0
2010 330.4 490.1
2011 353.5 524.4
2012 378.3 561.1
2013 404.8 600.3
2014 433.1 642.4
2015 463.4 687.3
2016 495.8 735.4
2017 503.6 786.9
2018 567.7 842.0

Demand for envelopes will increase from 330 tonnes in the year 2010 to 433.1 tonnes and
567.7 tonnes by the year 2014 and year 2018, respectively. Similarly, the demand for
labels and badges of paper will increase from 490.1 tonnes in the year 2010 to 642.4
tonnes and 842 tonnes by the year 2014 and 2018, respectively.

3. Pricing and Distribution

The price of envelopes and labels and badges varies according to the quality of the paper
used and the various designs to be printed. The average CIF value per kg of envelopes
and labels and badges of paper during the last two years [2005-2006] was about Birr
13.28 and Birr 27.68, respectively. Adding 40% for other expenses, i.e., duty, inland
transport and other charges Birr 18.59 and Birr 38.75 per kg of envelopes, labels and
badges, respectively, is recommended as a -gate price.
 85-8

Envelopes can find their market outlet through the existing stationery goods distributing
enterprises. Labels and badges can be sold directly to the user industries.

B. PLANT CAPACITY & PRODUCTION PROGRAMME

1. Plant Capacity

Based on the demand projection indicated in Table 3.2 and minimum economies of scale,
the proposed plant will have a production capacity 200 tonnes of envelopes and 300
tonnes of labels and badges per annum. The plant is envisaged to operate in a single shift
of 8 hours for 300 days per year. However, production capacity can be doubled, if the
plant is operated double shift of 16 hours a day based on actual market conditions.

2. Production Programme

The fact that manufacturing of envelopes, labels and badges are very simple processes, it
may take only a short time to develop the specific skills and knowhow of envelop
production. But the market penetration will take two years. The production build-up
programme is, therefore, recommended to be 70% and 90% of the full capacity operation
in the first and second year and 100% in the third year and thenafter respectively. Table
3.3 below shows the production programme indicating capacity utilization of the plant.

Table 3.3

PRODUCTION PROGRAMME

Description Unit of Production Programme

Measure Year-1 Year-2 Year 3-15
Envelope Production Tonnes 140 180 200
Labels and badges Tonnes 210 270 300
Capacity utilization % 70 90 100
 85-9

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The main raw materials required for the manufacturing of envelopes, labels and badges of
paper are Kraft paper rolls, paper for labels and badges, adhesive and printing ink. All the
raw materials are imported. Auxiliary materials required by the plant include card board
boxes which can be obtained from local packing material producers. Table 4.1 below
shows annual requirement of major raw and auxiliary materials at full production
capacity of envelopes. The total cost of raw and auxiliary materials will, therefore, be
Birr 12,172,000.

Table 4.1

RAW MATERIALS REQUIREMENT AND COST (TONNES)

Sr. Description Qty. Cost’000 (Birr )

No.
1 Kraft Paper for envelopes 200 2,000
2 Paper for label and badges 300 6,900
3 Adhesive 100 1,260
4 Printing ink 36 1,512
5 Packing materials - 500
Total Amount 12,172

B. UTILITIES

Electricity and water are the major utilities required by the plant. The total annual
requirement at 100% capacity utilization rate and the estimated costs are given in Table
4.2 below. The annual expenditure on utilities will, therefore, be Birr 73,082.
 85-10

Table 4.2
UTILITIES CONSUMPTION AND COST AT FULL CAPACITY

Sr. Unit of
Utility Qty. Total Cost (Birr)
No. Measure
1 Electricity kWh 120,000 56,832
2 Water m3 50,000 16,250
Grand Total 73,082

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The manufacturing process of envelopes involves the following steps:

- Cutting paper into required sizes

- Feeding cut papers into the envelope making machine in blocks of 150 to 200 sheets
depending upon the thickness of the paper,
- Folding and gluing the envelopes to form the required envelop,
- The envelopes are, then, packed in thousands and distributed to retail stationery shops.
The process doesn’t have adverse effect to the environment.

The manufacturing process of labels and badges involves the following steps;
photoengraving, die making and printing. These process steps are described in detail as
follows:
 85-11

Photoengraving: - before any labels and badges can be printed, the labels and badges
must be designed and transferred onto a printing block.

Die Making: - The label and badges which arrives in bulk must be cut to the desired
label size with a die.

Printing: - After the die is made and the printing block is ready, the labels can be printed
and cut in the printing machine.

The technology required to produce envelopes, labels and bages of paper is free from
negative environmental impact.

2. Source of Technology

The machinery required to manufacture envelopes are simple. All the machineries have
to be imported from abroad. The following companies are recommended as source of
technology and machinery.

1. Associate Pacific Machine Corporation;

724 Via Alonndra;
Camarillo, CA, 93012 USA;
805(445-4740(800);
679 – APMC.

2. M/s ACME Sale s Corporation,

2, Jain Mandir,
Sultan wind Road,
Amritsar

3. M/s A. Ghosh & Co (P) Ltd.

47, Jhantala Road,
Calcutta-700072
 85-12

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for making paper envelopes is given in
Table 5.1. The total estimated cost of machinery and equipment is estimated at Birr 5.5
million, out of which Birr 4.675 million is in foreign currency.

Table 5.1

MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Machine/Equipment Qty. Cost(Birr)

No. Description LC FC TC
1. Paper Cutting Machine 1 74,250 420,750 495,000
2. Multi-size Envelop Making 1
Machine 115,500 654,500 770,000
3. Moulds and dies Req. 41,250 233,750 275,000
4. Working table Req. 33,000 187,000 220,000
5 Photopolymer Cliché processor 1 71,775 406,725 478,500
6 Flat Die-cutter Making Tool 1 66,000 374,000 440,000
7 Printing machine 1 132,000 748,000 880,000
8 Sheeting machine 2 51,150 289,850 341,000
9 Rewinding machine 1 43,725 247,775 291,500
10 UV Dryer 1 80,850 458,150 539,000
11 Rotary UV Tinter 1 61,875 350,625 412,500
12 Slitting machine 1 53,625 303,875 357,500
Total 825,000 4,675,000 5,500,000
 85-13

2. Land, Building and Civil Works

The required area for both building and open space for the plant is estimated to be 1000
m2, out of which 500 m2 will be a built-up area. 250m2 of the area will be covered by
production hall, 150m2 of area by office building and 100m2 by store. The total cost of
civil works, at the rate of Birr 2,300 per m2 (with EGA sheet roof, HCB wall, cement
screed floor finish), is estimated at Birr 1,150,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

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.
 85-14

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the City’s Investment Authority.
However, if the land request is above 5,000 m2 the request is evaluated by the City’s
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

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

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

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.
 85-15

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years .

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The plant will require about 27 workers at the beginning of the plant operation. The
breakdown of manpower allocation and annual labour cost including fringe benefit is
indicated in Table 6.1. The total annual cost of manpower is estimated at Birr 327,750.
 85-16

Table 6.1

MANPOWER REQUIREMENT AND ANNUAL LABOUR COST (IN BIRR)

Sr. Req. Salary Salary

No. Description No. Monthly Annual
1. Plant Manager 1 3,000 36,000
2 Production and tech. head 1 2,500 30,000
3. Production supervisor 1 1,200 14,400
4. Technician Operators 8 5,600 67,200
5. Assistant operators 6 2,400 28,800
6 Electrician 1 800 9,600
7 Mechanic 1 800 9,600
8. Sells & Purchase Person 1 1,200 14,400
9 Accountant 1 1,200 14,400
10 Personnel 1 1,200 14,400
11. Store keeper 1 400 4,800
12. Driver 1 500 6,000
13 Guard 3 1,050 12,600
Sub-Total 27 262,200
Workers benefit 25% of basic
Salary 65,550

Total 327,750

B. TRAINING REQUIREMENT

Supervisor, operators and technicians (mechanic and electrician) need to be trained on the
operation and maintenance of machinery for two weeks by the expert of the machinery
supplier during commissioning and erection. The total cost of training is estimated at
Birr 50,000.
 85-17

VII. FINANCIAL ANALYSIS

The financial analysis of the paper envelop and badges project is based on the data
presented in the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw Material import 90 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 3% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
11.96 million, of which 39 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 85-18

Table 7.1
INITIAL INVESTMENT COST ( ‘ 000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,150.00 - 1,150.00
3 Plant Machinery and Equipment 825.00 4,675.00 5,500.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 722.06 - 722.06
7 Working Capital 1,962.36 - 1,962.36
Total Investment cost 7,285.42 4,675.00 11,960.42

* N.B Pre-production expenditure includes interest during construction ( Birr 572.06

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

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 14.04
million (see Table 7.2). The raw material cost accounts for 86.68 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and repair and maintenance which account for 5.25 %, 3.25% and 1.96 %
respectively. The remaining 2.85 % is the share of utility, direct labour, labour over head
and other administration cost.
 85-19

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

Items Cost %
Raw Material and Inputs
12,172.00 86.68
Utilities 73.08 0.52
Maintenance and repair
275.00 1.96
Labour direct 157.32 1.12
Labour overheads
65.55 0.47
Administration Costs 104.88 0.75
Land lease cost
- -
Total Operating Costs 12,847.83 91.50
Depreciation 737.50 5.25
Cost of Finance 456.39 3.25
Total Production Cost
14,041.72 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 400.60 thousand to
Birr 1.22 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 12.48 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
 85-20

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

BE = Fixed Cost = 29 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 7 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
 85-21

in a bank account. Accordingly, the IRR of this porject is computed to be 13.40 %

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

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 1.61 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 27 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.39 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project has a forward linkage effect with the
manufacturing sector.