91.

PROFILE ON THE PRODUCTION OF

RETREADED TYRES
 91-ii

TABLE OF CONTENTS

PAGE

I. SUMMARY 91-2

II. PRODUCT DESCRIPTION & APPLICATION 91-3

III. MARKET STUDY AND PLANT CAPACITY 91-3

A. MARKET STUDY 91-3
B. PLANT CAPACITY & PRODUCTION PROGRAM 91-6

IV. MATERIALS AND INPUTS 91-6

A. RAW & AUXILIARY MATERIALS 91-6
B. UTILITIES 91-7

V. TECHNOLOGY & ENGINEERING 91-7

A. TECHNOLOGY 91-7
B. ENGINEERING 91-10

VI. HUMAN RESOURCE & TRAINING REQUIREMENT 91-15

A. HUMAN RESOURCE REQUIREMENT 91-15
B. TRAINING REQUIREMENT 91-16

VII. FINANCIAL ANLYSIS 91-16

A. TOTAL INITIAL INVESTMENT COST 91-17
B. PRODUCTION COST 91-18
C. FINANCIAL EVALUATION 91-19
D. ECONOMIC AND SOCIAL BENEFITS 91-20
 91-iii

I. SUMMARY

This profile envisages the establishment of a plant for the production of retreaded tyre with a
capacity of of 235, 000 units (average equivalent weight of 8,500 tons) per annum. A retreaded tyre
is a previously worn tyre which has gone through a remanufacturing process designed to extend
its useful service life. Retreaded tyres are widely used in large-scale operations such as trucks,
buses and commercial aviation.

The demand for retreaded tyre is met through local production and import. The present (2012)
demand for retreaded tyre is estimated 359,995 pieces. The demand for retreaded tyre is
projected to reach 528,950 pieces and 777,201 pieces by the year 2017 and 2022, respectively.

The principal raw materials required are used tyre casing, camelback/thread, cement and
solvents. Tyre casing is available locally while the solvent and thread have to be imported.

The total investment cost of the project including working capital is estimated at Birr 70.32
million. From the total investment cost, the highest share (Birr 35.37 million or 50.30%) is
accounted by fixed investment cost followed by initial working capital (Birr 29.06 million or
41.33%) and pre operation cost (Birr 5.88 million or 8.37%). From the total investment cost Birr
24 million or 34.12% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 23.04% and a net present
value (NPV) of Birr 50.58 million, discounted at 10%.

The project can create employment for 10 persons. The establishment of such factory will have a
foreign exchange saving effect to the country by substituting the current imports. The project
will also create backward linkage with recycled waste (green/sustainable) material sub sector and
forward linkage with the freight transport, passenger transport, and commercial aviation sub
sectors and also generates income for the Government in terms of tax revenue and payroll tax.
 91-iv

II. PRODUCT DESCRIPTION AND APPLICATION

A retread, also sometimes known as a "recap or a "remold" is a previously worn tyre which has
gone through a remanufacturing process designed to extend its useful service life. Retreading
starts with a safety inspection of the tyre. The old thread is then buffed away, and a new rubber
thread is applied to the bare "casing" using specialized machinery.

Retreads are significantly cheaper than new tyres. As a result, they are widely used in large-scale
operations such as trucks, buses and commercial aviation. They are also the most
environmentally friendly way of recycling used tyres - in some applications; a tyre can be
retreaded up to 10 times. Retreading of tyre is a recycling job. While it takes 26.5 liters of crude
oil to manufacture one new passenger tyre, a retread requires only 9.5 liters. The savings in
truck-tyre retreading are even greater.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The local demand for retreaded tyres is met through local production and import. However, there
is no available data that indicates the amount of retreaded tyre locally produced and imported.
Hence, an indirect approach (based on local production and import of new tyres) is employed to
estimate the demand for the product. Accordingly, Table 3.1 shows local production and import
of new tyres.
 91-v

Table 3.1

TOTAL SUPPLY OF TYRE FOR VEHICLES (PCS)

Local
Productio
Year n Import Total
2002 197,540 532,725 730,265
1,026,69
2003 191,309 835,382 1
2004 181,725 738,318 920,043
2005 210,374 786,850 997,224
2006 211,725 741,742 953,467
1,186,51
2007 285,134 901,383 7
1,283,72
2008 316,337 967,385 2
1,140,50 1,530,88
2009 390,374 8 2
1,252,62
2010 322,939 929,682 1
1,177,68 1,623,93
2011 446,257 1 8

Source: 1. CSA, Report of the Survey of the Manufacturing and Electricity Industries.
2. Ethiopian Revenues and Customs Authority.

As can be seen from Table 3.1 total supply or apparent consumption of new tyres during the
period 2002 – 2011 fluctuates from year to year ranging from the lowest 730,265 pieces in 2002
to the highest 1.62 million pieces in 2011. However a general growth can be observed. For
example the average annual total supply during the first five years (2002-2006) which was
925,538 pieces has increased to an average of 1,375,536 during the next five years (2007-2011).
Moreover, during the period under consideration (2002--2011) total supply of tyres for vehicle
has registered an average annual growth rate of 10.84%.

Therefore, assuming that the growth rate registered by the total supply of the product in the past
will continue at least in the near future, the present (2012) demand for new vehicle tyres is
estimated at 1,799,973 pieces by taking the 2011 level of total supply as a base and applying a
 91-vi

growth rate of 10.84%. It is also assumed that locally produced retreaded tyres can substitute
20% of the demand for new tyres. Accordingly, the present demand for retreaded tyres is
estimated at 359,995 pieces.

2. Demand Projection

The future demand for vehicle tyres depends on the growth of the fleet size of vehicles in the
country. The total number of inspected and registered vehicles in the country in 2000 was only
96,504. This number has grown to 199,414 in 2010. During the period 2000 – 2010 the number
of operational vehicles has registered an average annual growth rate of 8.04%, accordingly, the
future demand for retreaded tyres is assumed to annually increase at the rate of 8%. (See Table
3.2)

Table 3.2

FORECASTED DEMAND FOR RETREADED TIRE (PIECES)

Year Projected
Demand
2013 388,794
2014 419,898
2015 453,489
2016 489,769
2017 528,950
2018 571,266
2019 616,967
2020 666,325
2021 719,631
2022 777,201
2023 839,377
2024 906,528
2025 979,050

3. Pricing and Distribution

 91-vii

The price of tyres varies according to size, type and origin. For the purpose of financial
analyses, an average a factory -get price of Birr 600 is adopted based on the current market price
for the products.

The tyre retreading service will be provided based on the orders to be given by individuals or
enterprises that require the service

B. PLANT CAPACITY AND PRODUCTION PROGRAM

1. Plant Capacity

The plant capacity of tyre recapping is mainly determined with the capacity of the vulcanizing
presses/or ovens. For the purpose of this study, considering the fierce competition from imported
ones and some local producers and the required investment a plant capacity of 235,000 pieces
(average equivalent weight of 8,500 tons is envisaged). From this total tonnage, about 45% of it the
genuine camel back is considered; as the casing is from the old tyre. This would mean a yearly
thread application of 3,825 tons, daily production capacity of 12.75 tons, working in 3 shifts a day
for 300 days a year.

Owing to a relatively high energy requirement of the production process, it is preferable to operate
the plant continuously. Besides, energy saving and recovery methods are devised and implemented.
In addition, good maintenance practice, and careful monitoring of the operation are required to
minimize operating costs as much as possible.

2. Production Program

The plant is initially made to operate at 75% of the installed capacity. It then gradually builds its
capacity up to 85% and l00% of the installed capacity in the second and third years, respectively.

As the plant will be new and to be equipped with new machinery, production build up is made to
start at reduced capacity and gradually raise to full capacity. This low production level at the initial
stage is to develop substantial market outlets for the product. Machinery operators will also get
enough time to develop the required skills and experience.
 91-viii

IV. MATERIAL AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw materials for tyre recapping are used tyre casing, camelback/tread, cement and
solvents. The required tyre casing can be obtained from local sources. Table 4.1 shows annual
requirement of auxiliary materials and related costs at full capacity operation.

Table 4.1

RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST

Sr.No. Qty. Cost (‘000 Birr)

Item (tons) F.C L.C Total
l Used Tire casing 4,675 - 9,400 9,400
2 Cushion gum and solvent 70 9 9
3 Pre-cured tread rubber 3,825 114,750 114,750
Grand Total 114,759 9,400 124,159

B. UTILITIES

Utilities required by the envisaged plant are water, electricity and steam. An oil- fired boiler will
be used to generate steam required by the plant. Table 4.2 shows the annual requirements of
utilities together with related costs.

Table 4.2

UTILITIES REQUIREMENT AND COST

Sr. Description Unit of Qty Unit Cost

Cost
No Measur (Birr)
. e
 91-ix

1 Electricity kWh 181,00 0.58 104,980

2 Water M3 2,0000 10.00 20,000
3 Fuel oil Litre 28,950 14.80 428,460
Total 553,440

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The process of retreading tyres can be divided into the following 5 consecutive steps:

 Initial inspection

Before retreading, every used tyre casing must pass inspection. The casing is carefully examined
by an inspector on a specific automatic inspection machine. It must be kept in mind that
inspection is always a matter of trained judgment. The most sophisticated equipment cannot
replace the inspector’s decision. Therefore the human element always plays an important part in
the process of retreading. The primary reason is to ensure the tyre casing will be able to be
retreaded and it is safe to return to operation.
Tire manufacturers design tyre to provide service greater than the thread will last, but due to
operating conditions or damaged to the tyre casing, a tyre may not be safe to return to service.

 Buffing and touching up the used tire

The buffing process establishes the foundation upon which the new thread is built. At buffing,
parts of the remaining original thread rubber are removed from the used tyre. The object of this
operation is to prepare a clean velvet surface with the correct texture for maximum adhesion of
the new thread rubber and establish the contour/ radius of the thread area. The casing must have
a specific shape in order to perform as designed after the retreading process. Since this is a
critical step, the newly developed buffing machines are synchronized with a computer with the
specific dimensions needed and allow it to control this buffing process.
 91-x

 Casing Preparation / Skiving / Buzz Out

This is the next step in inspecting the tyre. Any injuries to the casing are further examined and
evaluated for repair. If these injured areas fall within specific repairing limitations, the damaged
area is prepared for a repair.
 Repairing

Once an injured area has been evaluated, cleaned, and prepared, a repair can be applied. A repair
is intended to extend the life of the tyre and provide a safe quality product for your operation.
Any other voids are filled with rubber to ensure a flat surface with no voids for the thread rubber
to be applied.

 Application of new rubber/Building

After the casing has been prepared and repaired, the casing is ready for the thread rubber. There
are three different types of thread applications: pre-cured rubber thread, Unicycle® pre-cured
rubber thread, and mold rubber. The pre-cured rubber process uses a thread that is already
molded and pre-cured into the thread pattern. The thread is wrapped around the casing with a
adhesive (cushion gum bonding layer) applied between the casing and the thread. The two ends
of the thread are spliced and stitched together.

The UniCircle® pre-cured thread is a seamless construction using a patented retreading process,
adhering the tread snugly to the casing. A laser positioning system ensures the thread is fit to the
casing precisely.

The mold rubber process is applied in the same fashion as a new tyre construction. This rubber is
un-cured or “green” rubber. The green rubber is wrapped around the casing in one continuous
ribbon as it leaves the extruder. The tyre is built up with layers until it has reached the
specifications needed for the thread.
After the application of a rubber solution by means of a spray-gun, uncured cushion gum with
the final profile is applied to the casing. After this application, the tyre is mounted on a rim.
 91-xi

 Vulcanization of the new tread

The envisaged plant may uses different curing methods depending on the tyre and the thread
pattern needed. Tyres with pre-cured thread rubber are placed into an autoclave and vulcanized
using time, temperature and pressure to bond the thread to the casing.

Tyres with green rubber thread are placed into a mold which exerts the pressure and heat to force
the un-cured rubber into the mold’s thread pattern and cure the green rubber. The green rubber is
changed from its original state (soft, tacky, stretchy) into a tough and hard rubber state. This
mold cure process creates a denser thread and greater bond resulting in better performance than
any other method. For vulcanization made in autoclaves are usually designed to process up to 22
tyres. The uncured cushion gum which acts as a bridge between tyre casing and pre-cured tread,
is vulcanized at a temperature of 95 to max. 110 0C. This process takes approx. 4% to 5 hours.
After the curing time all tyres in the autoclave are finished simultaneously.

 Final inspection

At the last step of production the finished tyres are carefully tested by the inspector on an
automatic inspection machine.

PROCESS FLOW DIAGRAM

The process of retreading of a tire can be described in diagrammatically in the following way:
 91-xii

2. Environmental Impact Assessment

Since the process uses no harmful solvents that have a tendency to leak from the system and
react with any water in the process, the environmental effect of the process is safe and does not
need any treatment considerations.

B. ENGINEERING

1. Plant Machinery and Equipment

Total cost of machinery and equipment is Birr 31.2 million of which Birr 24 million is required
in foreign currency. The type of machineries and equipment required are indicated in Table 5.1.

Table 5.1

LIST OF MACHINERY & EQUIPMENT

Sr.
Description Quantity
No.
1 Tire inspection machine 1
2 Buffing machine 3
3 Tire builder 2
4 Hoists 4
5 Monorail 2
6 Conveyors 2
7 Tire repair spreaders 3
8 Tire buzz-out repair stations 3
9 Airless spraying tuners 3
10 Buzz-out repair filling stations 3
 91-xiii

11 Enveloping machine 4
12 Rim fitting machines 4
13 Curing chamber 3
14 Autoclaves 3

2. Land, Building and Civil Works

Land area is required for factory building, administration building, space for social facilities, for
internal roads and pathways, and space for future expansion. The total land area required is
estimated to be 800 m2. Of the total land area, 600 m2 will be built-up area. At the rate of Birr
5,000 per m2, the total cost of building and civil work is estimated at Birr 3 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.
 91-xiv

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 below
5,000 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.

Moreover, the Addis Ababa 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.

The second zone, Transitional Zone, will also have five levels and the floor land lease price
ranges from Birr 1,035 to Birr 555 per m2 .This zone includes places that are surrounding the city
and are occupied by mainly residential units and industries.

The last and the third zone, Expansion Zone, is classified into four levels and covers areas that
are considered to be in the outskirts of the city, where the city is expected to expand in the future.
The floor land lease price in the Expansion Zone ranges from Birr 355 to Birr 191 per m 2 (see
Table 5.2).
 91-xv

Table 5.2

NEW LAND LEASE FLOOR PRICE FOR PLOTS IN ADDIS ABABA

Floor
Zone Level Price/m2
1st 1686
2nd 1535
Central Market
3rd 1323
District
4th 1085
5th 894
1st 1035
2nd 935
Transitional zone 3rd 809
4th 685
5th 555
1st 355
2nd 299
Expansion zone
3rd 217
4th 191

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all
new manufacturing projects will be located in industrial zones located in expansion zones.
Therefore, for the profile a land lease rate of Birr 266 per m 2 which is equivalent to the average
floor price of plots located in expansion zone 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 5.3
shows incentives for lease payment.
 91-xvi

Table 5.3

INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored Point Period Period t

Above 75% 5 Years 30 Years 10%

From 50 - 75% 5 Years 28 Years 10%

From 25 - 49% 4 Years 25 Years 10%

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

Accordingly, the total land lease cost at a rate of Birr 266 per m 2 is estimated at Birr 212,800 of
which 10% or Birr 21,280 will be paid in advance. The remaining Birr 191,520 will be paid in
equal installments with in 28 years i.e. Birr 6,840 annually.

VI. HUMAN RESOURCE & TRAINING REQUIREMENT

A. HUMAN RESOURCE REQUIREMENT

A total of 10 persons are required for both administrative and production activities. The annual
cost of labor is Birr 183,600. The mix of employees of the plant with related monthly salaries
and annual wages is shown in Table 6.1.
 91-xvii

Table 6.1

HUMAN RESOURCE REQUIREMENT AND LABOR COST (BIRR)

Sr. Job Title No. Monthly Annual Wages

No. Salary
1 Administration 2 5,000 60,000
2 Mechanic 1 2,200 26,400
3 Skilled worker 2 3,600 43,200
4 Unskilled worker 5 4,500 54,000
Total 10 183600

B. TRAINING REQUIREMENT

Training is required for production workers particularly for quality skilled laborer. The training
program will be executed at the plant site during erection and commissioning. The machinery
supplier will be responsible to conduct the training program. A total of Birr 20,000 will be
allocated for the training program.

VII. FINANCIAL ANALYSIS

The financial analysis of the retreaded tyres 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 10%
Discount cash flow 10%
Accounts receivable 30 days
Raw material local 30 days
Raw material imported 120 days
Work in progress 1 day
 91-xviii

Finished products 30 days

Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost
A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 70.32
million (see Table 7.1). From the total investment cost, the highest share (Birr 35.37 million or
50.30%) is accounted by fixed investment cost followed by initial working capital (Birr 29.06
million or 41.33%) and pre operation cost (Birr 5.88 million or 8.37%). From the total
investment cost Birr 24 million or 34.12% is required in foreign currency.

Table 7.1

INITIAL INVESTMENT COST ( ‘000 Birr)

Local Foreign Total %

Sr. No. Cost Items Cost Cost Cost Share
1 Fixed investment
1.1 Land Lease 21.28 21.28 0.03
1.2 Building and civil work 3,000.00 3,000.00 4.27
1.3 Machinery and equipment 7,200.00 24,000.00 31,200.00 44.37
1.4 Vehicles 900.00 900.00 1.28
1.5 Office furniture and equipment 250.00 250.00 0.36
Sub -total 11,371.28 24,000.00 35,371.28 50.30
2 Pre operating cost *
2.1 Pre operating cost 1,286.00 1,286.00 1.83
2.2 Interest during construction 4,600.60 4,600.60 6.54
Sub-total 5,886.60 5,886.60 8.37
3 Working capital 29,065.56 29,065.56 41.33
Grand Total 46,323.43 24,000.00 70,323.43 100
* N.B Pre operating cost include project implementation cost such as installation, startup, commissioning, project
engineering, project management etc and capitalized interest during construction.

** The total working capital required at full capacity operation is Birr 41.51 million. However, only the initial working capital of
Birr 29.06 million during the first year of production is assumed to be funded through external sources. During the
remaining years the working capital requirement will be financed by funds to be generated internally (for detail working
capital requirement see Appendix 7.A.1).
 91-xix

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 138.30 million (see
Table 7.2). The cost of raw material account for 89.77% of the production cost. The other major
components of the production cost are depreciation, financial cost and repair and maintenance
which account for 4.93%, 3.20% and 1.13%, respectively. The remaining 0.96% is the share of
cost of utility, marketing and distribution, labor direct, 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)

Items Cost (000 Birr) %

Raw Material and Inputs 124,159.00 89.77
Utilities 553.00 0.40
Maintenance and repair 1,560.00 1.13
Labor direct 184.00 0.13
Labor overheads 46.00 0.03
Administration Costs 200.00 0.14
Land lease cost - -
Cost of marketing and distribution 350.00 0.25
Total Operating Costs 127,052.00 91.87
Depreciation 6,822.20 4.93
Cost of Finance 4,428.08 3.20
Total Production Cost 138,302.28 100

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 6.94 million to Birr 13.77 million
during the life of the project. Moreover, at the end of the project life the accumulated net cash
 91-xx

flow amounts to Birr 131.57 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. It is also an indicator for the strength and weakness of
the firm or a project. Using the year-end balance sheet figures and other relevant data, the most
important ratios such as return on sales which is computed by dividing net income by revenue,
return on assets (operating income divided by assets), return on equity (net profit divided by
equity) and return on total investment (net profit plus interest divided by total investment) has
been carried out over the period of the project life and all the results are found to be satisfactory.

3. Break-even Analysis

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 52,219,148
Variable Margin ratio (%)

Break -Even Capacity utilization = Break -even Sales Value X 100 = 36 %

Sales revenue
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.
 91-xxi

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 23.04%% 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 50.58 million which is acceptable. For detail discounted cash flow see Appendix 7.A.5.

D. ECONOMIC AND SOCIAL BENEFITS

The project can create employment for 10 persons. The project will generate Birr 33.32 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 will also create backward
linkage with recycled waste (green/sustainable) sub sector and forward linkage with the freight
transport, passenger transport, and commercial aviation sub sectors and also generates other
income for the Government.
 91-xxii

Appendix 7.A

FINANCIAL ANALYSES SUPPORTING TABLES

 91-22

Appendix 7.A.1
NET WORKING CAPITAL ( in 000 Birr)

Items Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11
21,727.83 24,831.80 31,039.75 31,039.75 31,039.75 31,039.75 31,039.75 31,039.75 31,039.75 31,039.75
Total inventory
7,420.12 8,475.97 10,587.67 10,587.67 10,588.24 10,588.24 10,588.24 10,588.24 10,588.24 10,588.24
Accounts receivable
19.35 22.11 27.64 27.64 27.73 27.73 27.73 27.73 27.73 27.73
Cash-in-hand
CURRENT 29,167.29 33,329.88 41,655.06 41,655.06 41,655.72 41,655.72 41,655.72 41,655.72 41,655.72 41,655.72
ASSETS
101.73 116.27 145.33 145.33 145.33 145.33 145.33 145.33 145.33 145.33
Accounts payable
CURRENT 101.73 116.27 145.33 145.33 145.33 145.33 145.33 145.33 145.33 145.33
LIABILITIES
TOTAL
WORKING 29,065.56 33,213.61 41,509.72 41,509.72 41,510.39 41,510.39 41,510.39 41,510.39 41,510.39 41,510.39
CAPITAL
 91-23

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

Year
Item 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11
86,911 99,327 124,159 124,159 124,159 124,159 124,159 124,159 124,159 124,159
Raw Material and Inputs
387 442 553 553 553 553 553 553 553 553
Utilities
1,092 1,248 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560
Maintenance and repair
129 147 184 184 184 184 184 184 184 184
Labour direct
32 37 46 46 46 46 46 46 46 46
Labour overheads
140 160 200 200 200 200 200 200 200 200
Administration Costs
0 0 0 0 7 7 7 7 7 7
Land lease cost
Cost of marketing 350 350 350 350 350 350 350 350 350 350
and distribution
89,041 101,712 127,052 127,052 127,059 127,059 127,059 127,059 127,059 127,059
Total Operating Costs
6,822 6,822 6,822 6,822 6,822 145 145 145 145 145
Depreciation
0 5,061 4,428 3,795 3,163 2,530 1,898 1,265 633 0
Cost of Finance
95,864 113,594 138,302 137,670 137,044 129,734 129,102 128,469 127,836 127,204
Total Production Cost
 91-24

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

Year Year
Item Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 10 11
102,81 146,87 146,87 146,87
3 132,188 5 146,875 5 146,875 5 146,875 146,875 146,875
Sales revenue
126,70 126,70 126,70
88,691 101,362 2 126,702 2 126,702 2 126,702 126,702 126,702
Less variable costs
14,122 30,826 20,173 20,173 20,173 20,173 20,173 20,173 20,173 20,173
VARIABLE MARGIN
13.74 23.32 13.73 13.73 13.73 13.73 13.73 13.73 13.73 13.73
in % of sales revenue
7,172 7,172 7,172 7,172 7,179 502 502 502 502 502
Less fixed costs
6,949 23,654 13,001 13,001 12,994 19,671 19,671 19,671 19,671 19,671
OPERATIONAL MARGIN
6.76 17.89 8.85 8.85 8.85 13.39 13.39 13.39 13.39 13.39
in % of sales revenue
5,061 4,428 3,795 3,163 2,530 1,898 1,265 633 0
Financial costs
6,949 18,594 8,573 9,205 9,831 17,141 17,773 18,406 19,039 19,671
GROSS PROFIT
6.76 14.07 5.84 6.27 6.69 11.67 12.10 12.53 12.96 13.39
in % of sales revenue
0 0 0 2,762 2,949 5,142 5,332 5,522 5,712 5,901
Income (corporate) tax
6,949 18,594 8,573 6,444 6,882 11,999 12,441 12,884 13,327 13,770
NET PROFIT
6.76 14.07 5.84 4.39 4.69 8.17 8.47 8.77 9.07 9.38
in % of sales revenue
 91-25

Appendix 7.A.4
CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr)

Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Scrap

TOTAL CASH INFLOW 36,657 136,581 132,203 146,904 146,875 146,875 146,875 146,875 146,875 146,875 146,875 47,932

Inflow funds 36,657 33,768 15 29 0 0 0 0 0 0 0 0

Inflow operation 0 102,813 132,188 146,875 146,875 146,875 146,875 146,875 146,875 146,875 146,875 0

Other income 0 0 0 0 0 0 0 0 0 0 0 47,932

TOTAL CASH
OUTFLOW 36,657 122,809 117,261 146,131 139,935 139,498 141,057 140,614 140,172 139,729 132,960 0
Increase in fixed assets 36,657 0 0 0 0 0 0 0 0 0 0 0
Increase in current assets 0 29,167 4,163 8,325 0 1 0 0 0 0 0 0

Operating costs 0 88,691 101,362 126,702 126,702 126,709 126,709 126,709 126,709 126,709 126,709 0

Marketing and
Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0

Income tax 0 0 0 0 2,762 2,949 5,142 5,332 5,522 5,712 5,901 0

Financial costs 0 4,601 5,061 4,428 3,795 3,163 2,530 1,898 1,265 633 0 0
Loan repayment 0 0 6,326 6,326 6,326 6,326 6,326 6,326 6,326 6,326 0 0

SURPLUS (DEFICIT) 0 13,772 14,942 773 6,940 7,377 5,818 6,261 6,703 7,146 13,915 47,932

CUMULATIVE CASH
BALANCE 0 13,772 28,713 29,486 36,427 43,804 49,622 55,882 62,586 69,732 83,647 131,579
 91-26

Appendix 7.A.5

DISCOUNTED CASH FLOW ( in 000 Birr)

Year
Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 10 Year 11 Scrap
146,87
TOTAL CASH INFLOW 0 102,813 132,188 5 146,875 146,875 146,875 146,875 146,875 146,875 146,875 47,932
146,87
Inflow operation 0 102,813 132,188 5 146,875 146,875 146,875 146,875 146,875 146,875 146,875 0

Other income 0 0 0 0 0 0 0 0 0 0 0 47,932

127,05
TOTAL CASH OUTFLOW 65,723 93,189 110,008 2 129,814 130,008 132,201 132,391 132,581 132,770 132,960 0

Increase in fixed assets 36,657 0 0 0 0 0 0 0 0 0 0 0

Increase in net working capital 29,066 4,148 8,296 0 1 0 0 0 0 0 0 0

126,70
Operating costs 0 88,691 101,362 2 126,702 126,709 126,709 126,709 126,709 126,709 126,709 0

Marketing and Distribution cost 0 350 350 350 350 350 350 350 350 350 350 0

Income (corporate) tax 0 0 0 2,762 2,949 5,142 5,332 5,522 5,712 5,901 0

NET CASH FLOW -65,723 9,624 22,180 19,823 17,061 16,867 14,674 14,484 14,294 14,105 13,915 47,932

CUMULATIVE NET CASH FLOW -65,723 -56,099 -33,919 -14,096 2,965 19,832 34,505 48,990 63,284 77,389 91,303 139,236

Net present value -65,723 8,749 18,331 14,893 11,653 10,473 8,283 7,433 6,668 5,982 5,365 18,480

Cumulative net present value -65,723 -56,974 -38,643 -23,750 -12,097 -1,624 6,659 14,091 20,760 26,741 32,106 50,586
 91-27

NET PRESENT VALUE 50,586

INTERNAL RATE OF RETURN 23.04%

NORMAL PAYBACK 5 years