PROFILE ON THE PRODUCTION OF PLYWOOD 1 Table of Contents I.SUMMARY ......................................................................................................................... 2 II.PRODUCT DESCRIPTION AND APPLICATION .............................................................. 3 III. MARKET STUDY AND PLANT CAPACITY .................................................................. 3 IV. RAW MATERIAL AND INPUTS ...................................................................................... 7 V.TECHNOLOGY AND ENGINEERING ............................................................................... 8 VI.HUMAN RESOURCE AND TRAINING REQUIREMENT ........................................... 14 VII. FINANCIAL ANALYSIS ................................................................................................ 15 FINANCIAL ANALYSES SUPPORTING TABLES ................................................................. 21 2 I.SUMMARY This profile envisages the establishment of a plant for the production of plywood with a capacity of 3,800 m3 per annum. Plywood is used for general construction purposes as interior material for housing, ships, vehicles and furniture. The demand for plywood is met both from domestic production and import. The present (2012) demandforplywoodisestimatedat1.5millioncubicmeters.Thedemandforplywoodis projectedtoreach2,203,992cubicmetersand3,238,387cubicmetersbytheyear2017and 2022, respectively. Theprincipalrawmaterialsrequiredarelogs,whicharesuitableforplywood,urearesin,glue andammoniumchloride.Thematerialsrequiredarelocallyavailableexceptforurearesinand ammonium chloride which have to be imported. ThetotalinvestmentcostoftheprojectincludingworkingcapitalisestimatedatBirr29.53 million.Fromthetotalinvestmentcostthehighestshare(Birr24.53millionor83.09%)is accounted by fixed investment cost followed by pre operation cost (Birr 2.84 million or 9.64%) and initial workingcapital (Birr2.14 million or7.26%).From the totalinvestment costBirr17 million or 57.56% is required in foreign currency.

The project is financially viable with an internal rate of return (IRR) of 18.31% and a net present value (NPV) of Birr 11.28 million discounted at 10%. The project can create employment for 48 persons.The establishment of such factory will have a foreignexchangesavingeffecttothecountrybysubstitutingthecurrentimports.Theproject willalsocreatebackwardlinkagewiththeforestrysubsectorandforwardlinkagewiththe construction, automotive and furniture sub sectors and also generates income for the Government in terms of tax revenue and payroll tax. . 3 II.PRODUCT DESCRIPTION AND APPLICATION Aproductobtainedasaresultofseveralevennumberedboardsbondedtogetheriscalled plywood.Plywood,thus,producedhastheparticularfeaturesofbeingawoodwiththeleast defects,widesize,highlengthandstrengthmechanicallyorphysically.Itisusedforgeneral construction purposes as interior material for housing, ships, vehicles and furniture III. MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY 1. Past Supply and Present Demand Demand for plywood is met both from domestic production and import.The Ethiopian Plywood EnterpriseistheonlyproducerofplywoodinEthiopia.Domesticproductionandimportof plywood for the past ten years is shown in Table 3.1. Table 3.1 DOMESTIC PRODUCTION AND IMPORT OF PLYWOOD (MT.CU) YearDomestic Production ImportTotal 2002677633,168 633,845 20031,168844,956846,124 2004-1,583,3321,583,332 20058,7222,148,0282,156,750 2006357240,292 240,649 2007 5112,374,1952,374,706 2008 930800,645 801,575 2009 1331,668,0001,668,133 2010 5,303497,009 502,312 2011N.A1,487,3281,487,328 Source: - For domestic; production Statistical Abstract of Ethiopia, CSA. For import; Ethiopian Revenues & Customs Authority 4 Table3.1revealsthatimportandmainlydomesticproductionhasbeenfluctuatingextremely. Domestic production during the initial three years of 2002--2004 ranges from nil to 1,168 cubic meters.During2004therewasnodomesticproductionofplywoodprobablyeitherdueto renovation or maintenance.In the year 2005 the domestic production has enormously expanded andhasreachedtoalevelof8,722cubicmeters.Duringthefollowingfourconsecutiveyears, i.e. 2006--2009,the production levelranged from 133 cubic meters to 930 cubic meters , which isverylowcomparedtoyear2005.Bytheyear2010itagainsharplyincreasedto5,303cubic meters. Theimporttrendwasrelativelybettercomparedtodomesticproduction,especiallyduringthe firstfiveyearsof2002--2007.Duringthisperiodtheimportedquantityhasbeengrowing consistently(exceptaslightdeclinein2007)fromalevelof633,168cubicmetersintheyear 2002 to about 2.4 million cubic meters during 2006/07. In the remaining four yeas of 2008--2011 a decline of import in oneyear was followed bya huge increase in the followingyear and vice versa. Ingeneral,whatcanbededucedfromTable3.1isthatthesupplyemanatingfromdomestic production was extremely very low compared to import throughout the time covered by the data series.Ifwetakethehighestdomesticproduction,whichis8,722cubicmetersandcompare withtheimportedquantityinthesameyearitsshareislessthanonepercentor0.4%.This indicatesthatthereisahugemarketinthecountrythroughimportsubstitutionusinglocally available raw materials. Todeterminethecurrenteffectivedemandforplywoodthedomesticproductionofyear2010 (sincedataisnotavailableforyear2011)plusthequantityimportedintheyear2011is considered to reflect the current demand.Accordingly, current demand is estimated at about 1.5 million cubic meters. 2. Projected Demand The demand for plywood is directlyrelated with thegrowth of the housingconstruction sector, household and office furniture's, vehicles assembly and repair service.Plywood has various uses 5 in housing construction for floors, roots, walls and doors.Inside a house, plywood often is used inavarietyoffurnishings,includingcabinetry,shelves,tablesandwallpaneling.Thedemand fortheseitemsinturnwilldependonincome,populationgrowth,urbanization,andthe manufacturing sector.Hence, by considering the recent past growth of the construction and the manufacturingsectoramodestgrowthofrateof8%perannumisdeemedtoberealisticto projectdemandforplywood.Thetotalprojecteddemand,theexistinglocalcapacityandthe unsatisfied demand for plywood is shown in Table 3.2. Table 3.2 PROJECTED DEMAND FOR PLYWOOD (CU.MT) YearTotalDemand Existing Domestic Capacity* Unsatisfied Demand 20131,620,0005,5001,614,450 20141,749,6005,5001,744,100 20151,889,5685,5001,884,068 20162,040,7335,5002,035,233 20172,203,9925,5002,198,492 20182,380,3115,5002,374,811 20192,570,7365,5002,565,236 20202,776,3955,5002,770,895 20212,998,5075,5002,993,007 20223,238,3875,5003,232,887 *Existing domestic capacity is estimated by considering the actual production of year 2010. As per the projection worked out in Table 3.2, the unsatisfied demand for ply wood will increase from about 1.6 million cubic meters in theyear 2013 to about 2.4 million cubic meters and3.2 millioncubicmetersintheyear2018and2022,respectively.Hence,anumberofsmallto medium and large industries can be established to satisfy the demand for plywood. 6 3. Pricing and Distribution ThecurrentproducerspriceoflocallyproducedplywoodisBirr4,750percubicmeter.The envisaged project can adopt a similar price. Distributionofplywoodwouldbehandledthroughdirectdeliverytomajorconstruction companiesandfurnituremanufacturingenterprise.Inaddition,theexistingbuildingmaterials enterprise can be used to reach for non-bulk purchasers. B.PLANT CAPACITY AND PRODUCTION PROGRAMME 1.Plant Capacity As per the projection worked out in Table 3.2, the unsatisfied demand for ply wood will increase from about 1.6 million cubic meters in theyear 2013 to about 2.4 million cubic meters and3.2 millioncubicmetersintheyear2018and2022,respectively.Hence,anumberofsmallto medium and large industries can be established to satisfy the demand for plywood. Takingaccountofvariousfactors,theproposedplantestimatedtohaveacapacityof3,800m3 perannum.Thisquantityofplywoodof4mmthickness,whichisaproductmostly,usedfor generalconstructionpurposessuchasinteriormaterialsforhousing,ships,vehicles,and furniture, etc.Its demand is ever on the increase. However, additional market requirement can be met by running the production unit on a second or third shift. 2.Production Program The unit is planned to operate one shift of 8 hours a day for a total working of 300 days a year by taking Sundays and national holidays into considerations. It is also anticipated to operate at 75% and 85% of installed capacity in the first and second year, respectively.Full capacity production is expected to be achieved in the successive years. The low production level at the initial stage isplannedtodevelopsubstantialmarketoutletsfortheproductandtobuildupproduction capacity of new equipment. 7 IV. RAW MATERIAL AND INPUTS A.RAW AND AUXILIARY MATERIALS Logs, which are suitable for plywood, urea resin, glue and ammonium chloride are the materials usedtoproduceplywood.Exceptforurearesinandammoniumchloridewhicharetobe imported,theothermaterialsrequiredarelocallyavailable.Theannualrawmaterial requirement is calculated on the bases of the final output. Thus, the total cost of materials at full operation capacity of the plant is estimated to be Birr 8,045,282. The detail breakdown is shown in Table 4.1. Table 4.1 RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST Sr. No. DescriptionQty.Cost ('000 Birr) FCLCTotal 1Logs (m3)8,750-70007000.0 2Urea resin (tone)290794.8- 794.8 3Ammonium chloride (kg)1000.482-0.482 4Glue (tone)15-250250.0 Grand Total795.287,2508045.282 B.UTILITIES Themajorutilitiesoftheprojectareelectricity,furnaceoilandwater.Thetotalannual expenditure on utilities is, thus, about Birr 1.34 million. Annual requirement and cost of utilities is indicated in Table 4.2. 8 Table 4.2 UTILITIES REQUIREMENT AND COST No.DescriptionAnnualUnitUnit Cost Total Costconsumption ( Birr) ( "000 Birr ) 1Electricity 93,000kwh0.6560.45 2Furnace oil 64,000lt15.00960.00 3Water 32,000m10.00320.00Total Annualcost1,340.50 V.TECHNOLOGY AND ENGINEERING A.TECHNOLOGY 1.Process Description The manufacturing of plywood comprises of three major steps.These are:- Preparation of logs; Veneer manufacturing from logs; and Plywood manufacturing from veneer. a)Preparation of logs Thissectionconsistsoftwomajorlogtreatmentoperations.Inthefirstone,logsarecutby chainsawtoadesiredlengthandfedtothelathetomakeveneersheets,whileinthesecond high-densitylogsarecookedincookingvatsorsteamchamberstofacilitatethecutting operation. b)Veneer Manufacturing Underthisprocessseveralphysicalactionssuchascutting,clipping,drying,joining,etc.are conductedonthelogobtainedfromthefirstsectioninordertopreparegoodqualityveneer suitable for plywood making. 9 c)Plywood manufacturing from veneer Inplywoodmaking,theinitialoperationisthepreparationofgluefortheprocess.The proceedingstepisthespreadingofglueonthecoreveneersheetsandthefinalisthepre-pressing of the stacked sheets by the cold press. After pre-pressing, the obtained plywood is fed to hot-press machine, where it is subjected toa pressure at a specified temperature. Then, the plywood is cut to a pre-determined size by cutting machine and stored for delivery. 2. Environmental impact The envisaged plant is a manufacturing plant with no hazardous chemical or any hazardous waste to the surrounding environment. But, in the process of raw material collection care must be taken not todisseminatetheriskofdeforestation,and tocounterthis,Birr100,000is would beallocated to support forestation projects in the country.B.ENGINEERING 1.Machinery and Equipment Cutting,slicing,clippingorpressinganddryingunitsaresomeofthemajormachineryand equipment required in the production of plywood. The total cost of machinery and equipment is estimatedatBirr18.84million,ofwhichBirr17millionisrequiredinforeigncurrency.Table 5.1 shows the list of machinery and equipment required by the envisaged plant. 10 Table 5.1 LIST OF MACHINERY AND EQUIPMENT Sr. No. DescriptionQty. 1Peeler1 2Veneer router1 3Veneer clipper1 4Veneer drying machine1 5Veneer splinter1 6Veneer splicer1 7Gluing machine1 8Conveyor (roller)1 9Pressing machine1 10Drying press1 11Plywood edger1 12Sanding machine (scraper belt, drum)1 13Boiler with its accessories1 14Polishing1 2.Building and Civil Works The plant requires a total of 1,800 m2 area of land out of which 1,000 m2 is built-up area which includes Processing area, raw material stock area, offices etc. Assuming construction rate of Birr 4500perm2.ThetotalinvestmentcostforbuildingandcivilworksisestimatedatBirr4.5 million. AccordingtotheFederalLegislationontheLeaseHoldingofUrbanLand(ProclamationNo 721/2004)inprinciple,urbanlandpermitbyleaseisonauctionornegotiationbasis,however, thetimeandconditionofapplyingtheproclamationshallbedeterminedbytheconcerned regional or city government depending on the level of development. 11 Thelegislationhasalsosetthemaximumonleaseperiodandthepaymentofleaseprices.The lease period ranges from 99 years for education, cultural researchhealth, sport,NGO , religious andresidentialareato80yearsforindustryand70yearsfortradewhiletheleasepayment period ranges from 10 years to 60 years based on the towns grade andtype of investment. Moreover,advancepaymentofleasebasedonthetypeofinvestmentrangesfrom5%to 10%.Theleasepriceispayableafterthegraceperiodannually.Forthosethatpaytheentire amountoftheleasewillreceive0.5%discountfromthetotalleasevalueandthosethatpayin installmentswillbechargedinterestbasedontheprevailinginterestrateofbanks.Moreover, based on the type of investment, two to seven years grace period shall also be provided. However,theFederalLegislationontheLeaseHoldingofUrbanLandapartfromsettingthe 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. InAddisAbaba,theCitysLandAdministrationandDevelopmentAuthorityisdirectly responsibleindealingwithmattersconcerningland.However,regardingthemanufacturing sector,industrialzonepreparationisoneofthestrategicinterventionmeasuresadoptedbythe City Administration for the promotion of the sector and all manufacturing projects are assumed to be located in the developed industrial zones. Regardinglandallocationofindustrialzonesifthelandrequirementoftheprojectisbelow 5,000m2, thelandleaserequestisevaluatedanddecideduponbytheIndustrialZone DevelopmentandCoordinationCommitteeoftheCitysInvestmentAuthority.However,ifthe land request is above 5,000 m2, the request is evaluated by the Citys Investment Authority and passedwithrecommendationtotheLandDevelopmentandAdministrationAuthorityfor decision, while the lease price is the same for both cases. Moreover,theAddisAbabaCityAdministrationhasrecentlyadoptedanewlandleasefloor 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 LandsLease Holding Proclamation. 12 The new regulation classified the city into three zones. The first Zone is Central Market District Zone,whichisclassifiedinfivelevelsandthefloorlandleasepricerangesfromBirr1,686to 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. Thesecondzone,TransitionalZone,willalsohavefivelevelsandthefloorlandleaseprice 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. Thelastandthethirdzone,ExpansionZone,isclassifiedintofourlevelsandcoversareasthat are considered to be in the outskirts of the city, where the city is expected to expand in the future. ThefloorlandleasepriceintheExpansionZonerangesfromBirr355toBirr191perm2 (see Table 5.2). Table 5.2 NEW LAND LEASE FLOOR PRICE FOR PLOTS IN ADDIS ABABA Zone Level Floor price/m2 Central Market District1st 1686 2nd 1535 3rd 1323 4th 1085 5th 894 Transitional zone1st 1035 2nd 935 3rd 809 4th 685 5th 555 Expansion zone1st 355 2nd 299 3rd 217 4th 191 Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all newmanufacturingprojectswillbelocatedinindustrialzoneslocatedinexpansionzones. 13 Therefore, for the profile a land lease rate of Birr 266 per m2 which is equivalent to the average floor price of plots located in expansion zone is adopted. Ontheotherhand,someoftheinvestmentincentivesarrangedbytheAddisAbabaCity Administrationonleasepaymentforindustrialprojectsaregrantinglongergraceperiodand extendingtheleasepaymentperiod.Thecriterionsarecreationofjobopportunity,foreign exchangesaving,investmentcapitalandlandutilizationtendencyetc.Accordingly,Table5.3 shows incentives for lease payment. Table 5.3 INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS Scored point Grace period Payment Completion Period Down Payment Above 75%5 Years30 Years10% From 50 - 75%5 Years28 Years10% From 25 - 49%4 Years25 Years10% For the purpose of this project profile the average i.e. five years grace period, 28 years payment completionperiodand10%downpaymentisused.Thelandleaseperiodforindustryis60 years. Accordingly, the total land lease cost at a rate of Birr 266 per m2 is estimated at Birr 478,800 of which10%orBirr47,880willbepaidinadvance.TheremainingBirr430,920willbepaidin equal installments within 28 years i.e. Birr 15,390 annually NB: The land issue in the above statement narrates or shows only Addis Ababas city administration land lease price, policy and regulations.Accordingly the project profile prepared based on the land lease price of Addis Ababa region. To know land lease price, police and regulation of other regional state of the country updated information is available at Ethiopian Investment Agencys website www.eia.gov.et on the factor cost. 14 VI.HUMAN RESOURCE AND TRAINING REQUIREMENT A.HUMAN RESOURCE REQUIREMENT The plywood manufacturing plant will create job opportunities for about 48 workers, of these 36 oftheemployeesareproductionworkerswhiletheremainingareadministrativestaff.Annual cost of labor is Birr 982,080. The detail is indicated in Table 6.1. Table 6.1 HUMAN RESOURCE REQUIREMENT AND LABOUR COST

Sr. No

Job Title No. of Persons

Salary (Birr) MonthlyAnnual ( 000 Birr) 1General Manager14,00048.00 2Secretary1100012.00 15 3Production & Technical Head12,50030.00 4Commercial Head12,50030.00 5Finance & Administration Head12,50030.00 6Personnel1200024.00 7Accountant1200024.00 8Accounts Clerk1100012.00 9Cashier1150018.00 10Sales person1100012.00 11Purchaser1150018.00 12Store Keeper1150018.00 13Quality Controller1150018.00 14Shift Leader3200072.00 15Operator91500162.00 16Assistant Operation91000108.00 17Labourer360021.60 18Mechanic3150054.00 19Electrician3150054.00 20Driver2100024.00 21Guard380028.80 Sub Total48 818.40 EmployeesBenefit20%basic salary 163.68 Grand Total982.08 B.TRAINING REQUIREMENT Impartingskillbothonthesupervisorandtheoperatorswhowillbedirectlyinvolvedinthe plywoodproductionisanessentialtask.Thus,on-job-trainingbythemachinerysupplierfor about two weeks should be given locally. The training cost is estimated to be Birr 80,000. VII.FINANCIAL ANALYSIS Thefinancialanalysisoftheplywoodprojectisbasedonthedatapresentedintheprevious chapters and the following assumptions:- Construction period1 year 16 Source of finance30 % equity & 70% loan Tax holidays3 years Bank interest10% Discount cash flow10% Accounts receivable 30 days Raw material local30 days Raw material imported 120 days Work in progress1 day Finished products30 days Cash in hand5 days Accounts payable30 days Repair and maintenance 5% of machinery cost A.TOTAL INITIAL INVESTMENT COST ThetotalinvestmentcostoftheprojectincludingworkingcapitalisestimatedatBirr29.53 million(SeeTable7.1).Fromthetotalinvestmentcostthehighestshare(Birr24.53millionor 83.09%) is accounted by fixed investment cost followed by pre operation cost (Birr 2.84 million or9.64%)andinitialworkingcapital(Birr2.14millionor7.26%).Fromthetotalinvestment cost Birr 17 million or 57.56% is required in foreign currency. Table 7.1 INITIAL INVESTMENT COST (000 Birr) Sr. NoCost ItemsLocalCost ForeignCost TotalCost%Share 1Fixed investment 1.1Land Lease47.88 47.880.16 1.2Building and civil work4,500.00 4,500.0015.24 1.3Machinery and equipment1,840.0017,000.0018,840.0063.80 1.4Vehicles900.00 900.003.05 1.5Office furniture and equipment250.00 250.000.85 17 Sub total7,537.8817,000.0024,537.8883.09 2Pre operating cost * 2.1Pre operating cost915.20 915.203.10 2.2Interest during construction 1,931.87 1,931.876.54 Sub total2,847.07 2,847.079.64 3Working capital **2,145.11 2,145.117.26 Grand Total12,530.0717,000.0029,530.07100 *N.BPreoperatingcostincludeprojectimplementationcostsuchasinstallation,startup, commissioning,projectengineering,projectmanagementetcandcapitalizedinterestduring construction.**ThetotalworkingcapitalrequiredatfullcapacityoperationisBirr2.81million.However, onlytheinitialworkingcapitalofBirr2.14millionduringthefirstyearofproductionis assumedtobefundedthroughexternalsources.Duringtheremainingyearstheworking capitalrequirementwillbefinancedbyfundstobegeneratedinternally(fordetailworking capital requirement see Appendix 7.A.1). B. PRODUCTION COST The annual production cost at full operation capacity is estimated at Birr 17.35 million (see Table 7.2).Thecostofrawmaterialaccountfor46.35%oftheproductioncost.Theothermajor components of the production cost are depreciation, financial cost and utility, which account for 24.98%,10.71%and5.88%respectively.Theremaining12.08%istheshareoflabour, marketing and distribution, repair and maintenance, labour 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 8,045.0046.35 18 Utilities1,020.005.88 Maintenance and repair 565.003.26 Labour direct 818.004.71 Labour overheads 164.000.94 Administration Costs 200.001.15 Land lease cost -- Cost of marketing and distribution 350.002.02 Total Operating Costs 11,162.0064.31 Depreciation 4,336.0424.98 Cost of Finance 1,859.4310.71 Total Production Cost 17,357.47100 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 Birr244 thousand to Birr 4.66 million duringthelifeoftheproject.Moreover,attheendoftheprojectlifetheaccumulatednetcash flowamountstoBirr33.85million.Forprofitandlossstatementandcashflowprojectionsee Appendix 7.A.3 and 7.A.4 respectively. 2. Ratios Infinancialanalysisfinancialratiosandefficiencyratiosareusedasanindexoryardstickfor 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 importantratiossuchasreturnonsaleswhichiscomputedbydividingnetincomebyrevenue, returnonassets(operatingincomedividedbyassets),returnonequity(netprofitdividedby 19 equity)andreturnontotalinvestment(netprofitplusinterestdividedbytotalinvestment)has been carried out over the period of the project life and all the results are found to be satisfactory. 3.Break-even Analysis Thebreak-evenanalysisestablishesarelationshipbetweenoperationcostsandrevenues.It indicatesthelevelatwhichcostsandrevenueareinequilibrium.Tothisend,thebreak-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 11,685,966 Variable Margin ratio (%) Break Even Capacity utilization= Break even Sales Value X 100 = 65 % Sales revenue4.Pay-back Period The pay-back period, also called pay off period is defined as the period required for recovering theoriginalinvestmentoutlaythroughtheaccumulatednetcashflowsearnedbytheproject. Accordingly, based on the projected cash flow it is estimated that the projects initial investment will be fully recovered within 6 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 ofreturnforaninvestmentisthediscountratethatmakesthenetpresentvalueofthe investment'sincomestreamtotaltozero.Itisanindicatoroftheefficiencyorqualityofan investment. A project is a good investment proposition if its IRR is greater than the rate of return thatcouldbeearnedbyalternateinvestmentsorputtingthemoneyinabankaccount. Accordingly,theIRRofthisprojectiscomputedtobe18.31%indicatingtheviabilityofthe project. 20 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 projectat 10% discount rate is found to be Birr11.28 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 48 persons.The project will generate Birr 9.85 million in termsoftaxrevenue.Theestablishmentofsuchfactorywillhaveaforeignexchangesaving effecttothecountrybysubstitutingthecurrentimports.Theprojectwillalsocreatebackward linkagewiththeforestrysubsectorandforwardlinkagewiththeconstruction,,automotiveand furniture sub sectors and also generates other income for the Government. 21 Appendix 7.A FINANCIAL ANALYSES SUPPORTING TABLES 21 Appendix 7.A.1 NET WORKING CAPITAL ( in 000 Birr) ItemsYear 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Year 11 Total inventory1,508.441,709.562,011.252,011.252,011.252,011.252,011.252,011.252,011.252,011.25 Accounts receivable704.92795.02930.17930.17931.45931.45931.45931.45931.45931.45 Cash-in-hand18.2020.6224.2624.2624.4824.4824.4824.4824.4824.48 CURRENT ASSETS2,231.552,525.202,965.682,965.682,967.182,967.182,967.182,967.182,967.182,967.18 Accounts payable86.4497.96115.25115.25115.25115.25115.25115.25115.25115.25 CURRENT LIABILITIES86.4497.96115.25115.25115.25115.25115.25115.25115.25115.25 TOTAL WORKING CAPITAL 2,145.112,427.242,850.432,850.432,851.932,851.932,851.932,851.932,851.932,851.93 22 Appendix 7.A.2 PRODUCTION COST ( in 000 Birr) ItemYear 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Year 11 Raw Material and Inputs6,0346,8388,0458,0458,0458,0458,0458,0458,0458,045 Utilities 7658671,0201,0201,0201,0201,0201,0201,0201,020 Maintenance and repair424480565565565565565565565565 Labour direct614695818818818818818818818818 Labour overheads123139164164164164164164164164 Administration Costs150170200200200200200200200200 Land lease cost0000171515151515 Cost of marketingand distribution 350350350350350350350350350350 Total Operating Costs8,4599,54011,16211,16211,17711,17711,17711,17711,17711,177 Depreciation4,3364,3364,3364,3364,336205205205205205 Cost of Finance02,1251,8591,5941,3281,0637975312660 Total Production Cost12,79516,00117,35717,09216,84212,44512,17911,91411,64811,382 23 Appendix 7.A.3 NET INCOME STATEMENT( in 000 Birr) Item Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Sales revenue14,44016,24518,05018,05018,05018,05018,05018,05018,05018,050 Less variable costs8,1099,19010,81210,81210,81210,81210,81210,81210,81210,812 VARIABLE MARGIN6,3317,0557,2387,2387,2387,2387,2387,2387,2387,238 in % of sales revenue43.8443.4340.1040.1040.1040.1040.1040.1040.1040.10 Less fixed costs4,6864,6864,6864,6864,701570570570570570 OPERATIONAL MARGIN1,6452,3692,5522,5522,5376,6686,6686,6686,6686,668 in % of sales revenue11.3914.5814.1414.1414.0536.9436.9436.9436.9436.94 Financial costs 2,1251,8591,5941,3281,0637975312660 GROSS PROFIT1,6452446939581,2085,6055,8716,1366,4026,668 in % of sales revenue11.391.503.845.316.6931.0532.5234.0035.4736.94 Income (corporate) tax0002873631,6821,7611,8411,9212,000 NET PROFIT1,6452446936718463,9244,1094,2954,4814,667 in % of sales revenue11.391.503.843.724.6921.7422.7723.8024.8325.86 24 Appendix 7.A.4 CASH FLOW FOR FINANCIAL MANAGEMENT ( in 000 Birr) ItemYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Year 11Scrap TOTAL CASH INFLOW25,45318,60316,25718,06718,05018,05018,05018,05018,05018,05018,0507,532 Inflow funds25,4534,163121700000000 Inflow operation014,44016,24518,05018,05018,05018,05018,05018,05018,05018,0500 Other income000000000007,532 TOTAL CASH OUTFLOW25,45312,62214,61516,11815,70015,52616,57816,39216,20616,02013,1780 Increase in fixed assets25,45300000000000 Increase in current assets02,23229444001000000 Operating costs08,1099,19010,81210,81210,82710,82710,82710,82710,82710,8270 Marketing andDistribution cost03503503503503503503503503503500 Incometax00002873631,6821,7611,8411,9212,0000 Financial costs01,9322,1251,8591,5941,3281,06379753126600 Loan repayment002,6562,6562,6562,6562,6562,6562,6562,65600 SURPLUS (DEFICIT)05,9811,6411,9492,3502,5241,4721,6581,8442,0304,8727,532 CUMULATIVE CASH BALANCE05,9817,6229,57111,92214,44615,91817,57619,42021,45026,32333,854 25 Appendix 7.A.5 DISCOUNTED CASH FLOW( in 000 Birr) ItemYear 1 Year 2Year 3 Year 4Year 5 Year 6Year 7 Year 8Year 9 Year 10Year 11Scrap TOTAL CASH INFLOW014,44016,24518,05018,05018,05018,05018,05018,05018,05018,0507,532 Inflow operation014,44016,24518,05018,05018,05018,05018,05018,05018,05018,0500 Other income000000000007,532 TOTAL CASH OUTFLOW27,5988,7419,96311,16211,45111,54012,85912,93913,01813,09813,1780 Increase in fixed assets25,45300000000000 Increase in net working capital2,145282423010000000 Operating costs08,1099,19010,81210,81210,82710,82710,82710,82710,82710,8270 Marketing and Distribution cost03503503503503503503503503503500 Income (corporate) tax 0002873631,6821,7611,8411,9212,0000 NET CASH FLOW-27,5985,6996,2826,8886,5996,5105,1915,1115,0324,9524,8727,532 CUMULATIVE NET CASH FLOW-27,598 -21,899-15,618-8,730-2,1314,3799,57114,68219,71424,66629,53837,070 Net present value-27,5985,1815,1915,1754,5074,0422,9302,6232,3472,1001,8782,904 Cumulative net present value-27,598 -22,417-17,226 -12,051-7,544-3,501-5712,0524,3996,4998,37811,281 NET PRESENT VALUE11,281 INTERNAL RATE OF RETURN18.31% NORMAL PAYBACK6 years 26