PROJECT PROPOSAL for establishment of COFFEE PROCESSING plant

PROMOTER :- HUSSEN NURI ADAM

Project To Be Implemented: IN SHEGER CITY GELAN SUB-CITY
JANUARY 2025

Gelan, Ethiopia
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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

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 5.4. Project implementation..................................................................................................................39
6. Human resource and training requirement...........................................................................................40
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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Executive Summary
1 Project Type Coffee Processing plant
2 Project Owners Hussen Nuri ADAM
3 Nationality Ethiopian
4
Project Location Oromia Region, Shegger city Gelan Sub-city

5 Hulled green coffee, roasted ground and packed coffee.

Project Composition

6 Premises Required 10,000 m2

Production at full 500 tons of hulled green coffee and 150 tons of roasted
capacity ground and packed coffee.

Marketing destination The project will supply 10% of its product for domestic
market and 90% of its product for export to international
market.
7 Source and From the total 655,000,000birr 30% or 196,500,000birr
investment Capital will be covered by the promoters’ equity and the rest 70%
or -458,5000,000will be covered by financial institutions.
8 Employment  Permanent and Temporary workers 500
Opportunity  Temporary workers 138


9 Benefits of the project Source of hard currency and government revenue through
taxation, and creates employment opportunity.
10 Raw Materials Clean green coffee, Jute bag, paper bag, corrugated paper
box with carton panel, and gumming paper.

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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

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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 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

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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%. 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 (Coffee arabica) and false cardamom (Aframomum
corrorima) [31],in addition to supporting local forest-based livelihoods, for
example, through shade coffee (i.e., coffee grown under shade trees) and
honey production [32,33]. Coffee is a dominant export commodity
accounting for over 25% of Ethiopia’s total foreign currency earnings and the
coffee production sector supports 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 and to
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,

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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. 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
Shegger city Gelan Sub-city.

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

Background of the promoter

Hussen Nuri Adam is an Ethiopian based company legally established as a

private limited company . The company has planned to establish multiple
business lines, which includes Coffee Processing and Production of other
value added Agricultural Commodities for Export as well as domestic
market.

However, the establishment of envisaged Integrated Coffee Processing and

Trading business line has planned to take place with-in the vicinity where
the raw input is available in bulk. having total initially investment capital
about ETB 100Million with the intention to establish a wider range of
market access for value added (processed) Ethiopian variety coffee with an
assumption of its target market segmentation about 60% for Export and
40% supply will be for Domestic Markets

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Functional Objectives

The business intends to fully engage in trading value added Ethiopian coffee of different localities
through export as well as in domestic markets. Hence, the functional objectives of envisaged project
include:

 To produce and supply reliable and all-level processed coffee

products for local and global market, which encompasses at
full capacity:-
 To start value added exportable coffee beans in which the
washed and cleaned coffee processing encompasses Roasting,
Grinding and Packing the final output with total capacity of 500
tons/year at full capacity.
 To enhance the technical skills and thereby increasing the
accessibility of product marketing by coffee farmers in
surrounding vicinity.
 To attain target profit earnings that allow the company for
further investment expansion in other regional areas

Description of the project

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.

However, currently the business owner has inspired to establish Processing (Roasting, Grinding and
Packing) of Specialty Coffee Beans of Ethiopian origin to be traded in both Domestic as-well-as

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Export market places. The envisaged business line will take place with the intention to maintain a
wider range of market access for Value Added/Processed Ethiopian variety coffee. With the
establishment of intended new business line, the company assumed that its target market
segmentation of trading activities of processed/value added coffee products will be supplied by a
proportion of 60% for Export and 40% supply will be for Domestic Markets. Basically,
producing/processing high quality of roasted and blended coffee for international market is the
core aim of the business

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 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

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packing plant for national and international market in Oromiya Regional
State, Shegger city Gelan Sub-city. 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

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.
 BUSINESS OBJECTIVE

The envisaged business intends to fully engage in processed coffee trading and other agricultural
commodities of different localities through export as well as in domestic markets. Currently the
company has secured Memorandum of Understanding that mutually signed with foreign buyer
for supply of 125 tons of processed and packed coffee products each quarter and a total of 500
tons for a period of one year. In this regard, the business has planned to supply processed/value
added coffee products of 60% for Export and 40% for Domestic Markets in the first year then to

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increase its capacity by 15% each proceeding years. Hence, the main company’s functional
objectives are includes:

 To fulfill a primary need of financial assistance of ETB 8.5 Million for intended
project plant lease financing and Export trade undertaking as Export tem loan at
prevailing bank interest rate.
 To perform contentious supply of quality processed coffee beans for attaining planned
sales by exporting in the global market.
 To maintain its export market share by increasing its operational capacity by 15% each
consecutive years.
 To start other value added different varieties of agricultural commodity exporting
activities in the coming two years, (such as: Processed quality Sesame seed varieties,
pulses, cereals, etc).
 To expand its trading activity by exporting internationally tradable products of Ethiopian
origin to attain Annual Export Revenue of US$ 5,000,000.- by year-5.
 To fully engage in supply of agricultural products by using modern processing
techniques and technology through creation of employment and foreign currency
generation.

To generate sustainable income for the company in order to expand the operation and other
development activities in the country

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.

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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 investment. The company plans to
alter the market dynamics of coffee by improving roasting and service standards in Shegger city.
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.

However, currently the business owner has inspired to establish Processing (Roasting, Grinding
and Packing) of Specialty Coffee Beans of Ethiopian origin to be traded in both Domestic as-
well-as Export market places. The envisaged business line will take place with the intention to
maintain a wider range of market access for Value Added/Processed Ethiopian variety coffee.
With the establishment of intended new business line, the company assumed that its target
market segmentation of trading activities of processed/value added coffee products will be
supplied by a proportion of 60% for Export and 40% supply will be for Domestic Markets.
Basically, producing/processing high quality of roasted and blended coffee for international
market is the core aim of the business 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.

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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 Shegger city Gelan Sub-
city 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.

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:

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• 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.

1.5. Project Location

The proposed project is intended to be established at Galan Sub City with a total planning area of
4,800m2. It is located at 25 km in southeast direction on the Addis Ababa- Adama highway. The
current boundary of Galan Sub city in the southeast is made by artificial boundary formed at the
junction of Ethio - Djibouti rail way and Addis Ababa-Adama high way. The town is bordered in
the East by Dalota and Mero mountain chain, Wedesso Mountain chain and Abayi Silto peasant
associations in the North, Akaki of Addis Ababa in the North-West and Lake Aba Samu‟el in
north-West.

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Topographically

There is an industrial zone in Shegger city Gelan Sub-city 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 Shegger city Gelan Sub-citys.

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

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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

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

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.

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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. 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

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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
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

20
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.

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.

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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 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)

22
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 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

23
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

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.

24
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

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

25
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.

ANNUAL RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST

26
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

27
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), hemolysis 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.

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

28
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.

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

29
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.

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.

30
Typical coffee roasting operation

31
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)

32
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 20000
m2. The total area of land required for the envisaged project is 20000 m2 .
The construction cost of buildings and civil works at a rate of Birr 14,500 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

33
concerning land. However, regarding the 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

34
 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.

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 Sheger City Gelan
Woreda 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
Environmental 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,

35
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
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 friendly major concern of the
Republic of Rwanda is sustainable economic development. There has been a
connect The 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

36
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

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 equipment 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 , 2025

2 approval March , 2025

3 Site Development April – May , 2025

4 Building and construction work June - November 2025

5 Preparation for service December, 2026

6 Service execution December , 2026

37
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

38
HUMAN RESOURCE REQUIREMENT AND LABOR COST

39
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.

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

40
Repair and maintenance 5% of machinery cost

7.1. Total Initial Investment Cost

The financial resource is a prime thing for undertaking any business activity. Thus, in order to
implement this Coffe processing ” Project, a total of 655,400,000.00 Ethiopian Birr initial
investment capital is required. Out of which, 30% (196,500,000.00 Birr) will be covered by the Public
(Government) whereas, the remaining 70% (458,500,000.00 Birr) will be covered by the promoter.
Table 10: Summary of Initial Investment Costs
S. No. Description Costs (Birr)
Fixed Investment
Land Lease Cost (10%) 27,972,945.00
Building, Construction & Civil Works 289,068,000.00
1) Tools, Equipment & Furniture 9,145,500.00
2) Vehicles 6,800,000.00
3) Transformer & Generator 2,000,000.00
Sub-total 481,780,000.00
4) Working Capital 163,620,000.00
5) Pre-operating Expenses
Feasibility Study & 3D Picture (Architectural 72,500.00
Design)
Man Power Training 20,000.00
Licensing Fee & Others 3,000.00
Sub-total 95,500.00
Grand Total 655,000,000.00

41
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)

42
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

43
 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.

44
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.

8. Financial analyses supporting tables

Appendix 7.A

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

45
 Appendix 7.A.2
PRODUCTION COST ( in 000 Birr)

46
Appendix 7.A.3

47
 INCOME STATEMENT (in 000 Birr)

Appendix 7.A.4

Cash flow for financial management (in 000 Birr)

48
 Appendix 7.A.5

DISCOUNTED CASH FLOW (in 000 Birr)

49
50