12.

PROFILE ON SOYA SAUCE BREWING

12-2
TABLE OF CONTENTS
PAGE

I.

I.

SUMMARY

12-3

II.

PRODUCT DESCRIPTION & APPLICATION

12-3

III.

MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY
B. PLANT CAPACITY & PRODUCTION PROGRAMME

12-4
12-4
12-7

IV.

MATERIALS AND INPUTS

A. RAW & AUXILIARY MATERIALS
B. UTILITIES

12-8
12-8
12-11

V.

TECHNOLOGY & ENGINEERING

12-11

A. TECHNOLOGY
B. ENGINEERING

12-11
12-13

VI.

MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

12-17
12-17
12-19

VII.

FINANCIAL ANLYSIS
A. TOTAL INITIAL INVESTMENT COST
B. PRODUCTION COST
C. FINANCIAL EVALUATION
D. ECONOMIC BENEFITS

12-19
12-19
12-20
12-21
12-23

SUMMARY

This profile envisages the establishment of a plant for the production of

with a capacity of 67,000 litters

soya sauce

per annum.

Major raw materials are soya bean or de-fatted soya bean, wheat, and salt, which are all
locally available.
The present demand for the proposed product is estimated at 38.71 tonnes
The demand is expected to reach at 192.97 tonnes by the year 2022.

per annum.

12-3

The total investment requirement is estimated at about Birr 8.93 million, out of which
Birr 220.46 thousand is required for plant and machinery.

The plant will create

employment opportunities for 43 persons.

The project is financially viable with an internal rate of return (IRR) of 20.48 % and a net
present value (NPV) of Birr 3.35 million, discounted at 8.5%.
The plant will have a backward linkage effect with the agriculture sector. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.
II.

PRODUCT DESCRIPTION AND APPLICATION

Soya sauce is a product made from soya beans. It contains exceptional natural delicacy
which is brought forth by the intervention of all sorts of amino acids originating from
their brewing and melting with other ingredients.

12-4
III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Soya sauce is a product made from soya beans. It contains exceptional natural delicacy
which is brought forth by the intervention of all sorts of amino acids originating from
their brewing and melting with other ingredients.
Presently, there is no local production of soya sauce; therefore demand for the product is
met through imports. It is imported into the country in bottles same as tomato ketchup
bottles.
The supply of soya sauce through imports was made possible initially because foreigners
needed to have it. At the beginning, it was not in the menu of Ethiopian nationals since
soya sauce was not in the list of their culinary considerations. Now-a-days, however, the
occasional consumption of soya sauce by Ethiopians of the urban middle class became an
ordinary occurrence. The rise in imports from 2 tonnes in year 1997 to 51 tonnes in year
2006 attests to the foregoing postulation (see Table 3.1) .
Table 3.1
IMPORT OF SOYA SAUCE (KG)
Year
Import
1997
1,979
1998
6,724
1999
7,957
2000
3,920
2001
12,604
2002
8,437
2003
14,723
2004
50,428
2005
14,743
2006
50,968
Average
17,248.3
Source: Customs Authority: Annual External Trade Statistics; Unpublished.

12-5
The average import of soya sauce from 1997 to 2006 is 17,248.30kg. The modest
increases in 2001-2002 from the previous 4 years and the steep rises in volume from
2003 and 2006 particularly in 2004 and 2006 is an indication that a food consumption
pattern adopting soya sauce is rapidly developing in urban Ethiopia.
A review of the import data from 2003-2006 gives the impression that the sharp increases
in 2004 and 2006 were probably intended to augment supply shortages in the
immediately preceding years 2003 and 2005. It can be deduced from this postulation that
the average of the 2004-2006 imports reflects demand for soya sauce as of 2006.
With increase of disposable income and growing palate for the delicacy of soya sauce
governing demand, the supply of and/or demand for soya sauce for 2008 is estimated to
be 47,700 kg which increased by 11% from the average import of the period 2004-2006
which was 38,713 kg.
2.

Projected Demand

It has been stated earlier that brewed soya sauce as nutritious food is gaining increasing
recognition among urban dwellers; particularly among above average income groups.
Regarding determination of future demand for soya sauce, both income and awareness
factors play the major roles. If increase in demand due to increase in disposable income
attributes an 11.0% increase and awareness contributes 4.0%, future demand for soya
sauce is assumed to increase at annual rate of 15.0% for the coming ten years (see Table
3.2.).

12-6
Table 3.2
DEMAND FORECAST FOR BREWED SOYA SAUCE (KG)

3.

Year

Forecasted

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Demand
54,855
63,083
72,546
83,427
95,942
110,333
126,883
145,945
167,803
192,973

Pricing and Distribution

Brewed soya sauce filled and packed in a 250 grams-holding-capacity bottle is currently
sold at Birr 16.00 on retail. A kilogram of soya sauce packed in 4 bottles is, therefore,
sold for Birr 64.00 per kg. Allowing a 25% margin for wholesalers and retailers, a factory
gate selling price of Birr 48.00/kg is recommended.
Being a food item itself and used in flavoring cooked food, soya sauce may be distributed
either directly to big hotels or super markets. The best distribution mechanism would,
however, be wholesalers specializing in distribution of processed and packed or canned
food items.
It is assumed that a local manufacturer will satisfy at least 60% of the demand for soya
sauce; and be prepared to meet the challenges of competition from imported products
both in quality and selling price terms.
B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

12-7
1.

Plant Capacity

Based on the market study, the production capacity of the envisaged soya sauce plant is
67,000 liters per year. The plant is expected to work for 288 days per annum and in a
single shift of 8 hours per day.
Production Programme

2.

The annual production programme is formulated on the basis of the market forecast and
selected plant capacity. It is assumed that the plant will achieve 70% and 85% capacity
utilization rate in the first and second year and full capacity will be attained in the third
year and onwards. The production programme for soya sauce is shown below on Table
3.3.
Table 3.3
PRODUCTION PROGRAMME
Sr.

Description

Production Programme
1 year
2nd year
3rd year
st

No.
1

Capacity utilization rate

70

85

100

[%]
Soya sauce production

46,900

56,950

67,000

[liter/year]

IV.

MATERIAL AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

1.

Main Raw Materials

12-8
The three main ingredients used in the production of soya sauce are soya bean, wheat,
and salt. The major raw materials soya bean and wheat are locally available in the
neighboring regions such as SNNPRS and Oromia Regional State while salt can be
sourced from Afar region, Afdera.
During the production process, the three raw materials are mixed in different ratio at
different production steps. That is soya bean: wheat is 9:1, and soya bean +wheat: salt is
1.5:1. Considering full capacity utilization, raw material consumption is given in Table
4.1.
Table 4.1
ANNUAL RAW MATERIAL REQUIREMENT AND COST ESTIMATES
Sr.

Description

Rate Of Raw Material

Amount Raw

Unit

Total

Consumption Per

Material Per

Price Per

Price

Product [Tonnes/m3]

Year

Kg

[Birr]

No.

1
Soya bean
2
Wheat
3
Salt
Grand Total
2.

0.281
0.0312
0.164

[Kg]
2,100
18,830
13,000

[Birr]
7.00
7.00
1.50

14,700
131,810
19,500
166,010

Auxiliary Materials

The major auxiliary material in soya sauce production is filling bottle, carton box and
scotch tape.
a) Filling bottles
Regarding filling bottles capacity, the one with 250ml (0.25lit) is fast running in market
than the one with 1 lit and above capacity. This can be due to handiness and easiness in
handling the container and consumer friendly structure and design of the bottles.
Therefore, 85% and 15% will be packed in 0.25,lit and 1 lit capacity bottles, respectively.

12-9
Taking the 100 % capacity utilization rate, the required filling bottle consumption is
given in Table 4.2.
Table 4.2
ANNUAL FILLING BOTTLE REQUIREMENT AND ITS COST ESTIMATES
Sr.

Packaging

Total Soya

Number

Bottle

Total

Unite

Total Cost

No.

Capacity

Sauce

of

Breakage

Number

Price

[Birr]

[Lit]

Production

Bottles

Allowance

of

[Birr]

Per Year

Required

2%

Bottles

1
2

[Lit/Yr]
56,950
10,050

0.250
1.00

Required
232,356
2.85
10,250
5.10

227,800
4,556
10,050
201
Grand Total

662,214.60
52,280.10
714,494.70

b) Carton box
The quantity and cost of ideal carton box size which is suitable to pack the two types of
bottle capacity is estimated at 100% capacity utilization rate of the plant in Table 4.3.

Table 4.3
ANNUAL REQUIREMENT OF CARTON BOX AND COST ESTIMATE
Sr.
No.

Packaging Volume Number

Carton

Amount

Annual

Carton

Unit

Total

Production

Box

Price

Price

[Birr]

[Birr]

Capacity

of The

of

Size

of

[Lit]

Bottle

Bottles

Lxwxh

Product

Per

[Cm3] *

Per Box

[Cm]

Per Box

Annum

[Lit]
1

0.250

294.5

4x5=20

28x23x15 5

56,950

11,390

2.25

25,627.50

12-10
2
1.00
Grand Total
*

1150

3x4=12

30x23x30 12

10,050

838

3.75

3,142.50
28,770.00

The volume of the bottles is estimated by adding 15% unfilled space above the
product

c) Scotch tape
The estimated scotch tape amount and its cost at 100% capacity utilization rate re given
in Table 4.4.
Table 4.4
ANNUAL REQUIREMENT OF SCOTCH TAPE AND COST ESTIMATE
Packaging Carton Length of
Capacity
Box
Scotch
[Lit]
Per
Tape
Annum Needed
to Seal
One
Carton*
[M]
0.250
11,390 0.76
1.00
838
0.8
Grand total

Length Estimated Total Length Required Unit

of
Waste
Length of One Number Price
Scotch Amount
of
Role
of Roles
of
Tape
[0.5%)
Scotch Scotch
One
Needed
[M]
Tape
Tape
Role
Per Yr
Needed
[M]
[Birr]
[M]
[M]

Total
Price
of
Roles
[Birr]

8,656.4
670.4

12,075
925
13,000

43.8
3.35

8,700
674

18
18

483
37

25
25

* The length of scotch tape required per carton box is estimated considering the total length and 10cm
tolerance of the length side of the box..

B.

UTILITIES

Electricity, water, and furnace oil are the three major utilities for production process of
soya sauce. The annual consumption and cost estimates at full plant capacity utilization is
given in Table 4.5.
Table 4.5
ANNUAL UTILITIES REQUIREMENT AND ESTIMATED COST
Sr.
No.

Description

Unit of
Measure

Qty/Yr

Unit Cost
[Birr]

Total Cost

12-11
1
2
3

Electricity
Furnace oil
Water

kWh
liter
m3
Grand Total

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

420,500
536
100

0.4736
5.84
3.25

198,912
600,000
325
704,754

Soyabean (or defatted soyabean): the most important raw material for soya sauce
protein, is heated by steam so that soya sauce koji of Aspergillus Oryzae will easily work
on protein. The quality and yield (Availability of nitrogen in raw material to product) of
soya sauce are swayed by this treatment. High temperature, high pressure, short time
treatment will greatly improve the quality and yield of the product. After being steamed,
the soya bean is cooled in a cooler down to the designated temperature.
Wheat: another important raw material of soya sauce is heat treated indirectly to produce
alfa-starch so that enzyme will work on it easily. Usually heated sand is used for roasting
the wheat, then the wheat is cooled in a cooler to the designated temperature, and finally
the wheat is crushed by a crusher.
The two kinds of treated raw material are seeded and taken into the koji room. The
treatment and humidity are controlled artificially to promote growth of koji fungus, and
koji is made in two days.
Salt: the third raw material of soya sauce, is dissolved in water to make saturated solution
of salt. After adjusting the concentration of the saturated solution of salt made it is cooled
in a refrigerator to the designated temperature. Then it is mixed with the koji and
fermented in the fermentation tank.

12-12
The koji and solution of salt fermented in the fermentation tank become moromi
(soyabean and wheat which are under fermentation). The moromi is kept under control
for a long period of time in a suitable temperature so that it is matured by the action of
enzyme, lactobacilli, yeast fungus, etc.
The matured moromi is pressed and separated into raw soya sauce and cake. The raw
soya sauce is cooled in a refrigerator and stored in low temperature. The raw soya sauce
is sweetened or other additives are added, depending on the tastes of consumers. It is
pasteurized by heating and then stored for a fixed period of time for sediment separation.
Next, the clear soya sauce is further filtered through a filter and made into beautiful,
highly fragrant, and tasty soya sauce. Finally, the completed soya sauce is filled in glass
bottles or plastic containers by the bottling machine, labeled, and dispatched. The
production process does not have any adverse impact on environment.

2.

Source of Technology

Machinery and technology for production of soya sauce can be obtained from a number
of suppliers. The one listed below are few of soya based product production plant
manufactures.
1.

Alfa Laval South East Asia Pte. Ltd. (SINGAPORE)

11 Joo Koon Circle, Jurong, Singapore 629043
Ph : 6559 2828 ; Fax : 6862 3567
Email: al.singapore@alfalaval.com
Website : www.alfalaval.com.sg

12-13
2.

Cottor International (INDIA)

706 Acme Plaza, Andheri-Kurla Road,
Opp. Sangam Talkies, Andheri(E),
Mumbai-400059, India
Tel: +91 (22) 2826 4201/2/3/4 Fax: +91 (22) 2834 6161

B.

ENGINEERING

1.

Machinery and Equipment

The total cost of machinery and equipments estimated to be Birr 225,900, out of which
Birr 194,849 will be required in foreign currency. Detail list of machinery and equipment
and their cost estimates are given in Table 5.1.

12-14
Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND ESTIMATED COST
Sr.
No.
1
2
3
4
5
6
7
8
9
10
11
12
13

Description
Raw material storage
equipment and
Accessories
Soyabean treatment
equipment and
Accessories
Wheat treatment
equipment and
Accessories
Mixing and heaping
equipment and
Accessories
Automatic koji making
equipment and
Accessories
Koji mixing and
transporting equipment
and accessories
Salt water dissolving
equipment and
Accessories
Moromi fermenting
equipment and
Accessories
Moromi pressing
equipment and
Accessories
Raw soya sauce storage
and cooling equipment
and Accessories
Pasteurization and
filtration equipment and
Accessories
Automatic bottling
equipment and
Accessories
Boiler and accessories
Grand Total

Qty.
1

Unit Cost
[Birr]
11,295.03

Total Cost [Birr]

F.C
L.C
Total
9,036.024.
2,259.01
11,295.03

31,626.09

25,300.87

6,325.22

31,626.09

36,144.09

28,915.27

7,228.82

36,144.09

9,036.02

8,132.42

903.6

9,036.02

13,554.03

12,198.63

1,355.4

13,554.03

13,554.03

12,876.328

677.702

13,554.03

9,036.02

8,855.30

180.72

9,036.02

20,331.05

20,331.05

20,331.05

24,849.06

24,600.57

248.49

24,849.06

6,777.02

656.71

6,120.31

6,777.02

15,813.04

15,496.78

316.26

15,813.04

30,708.07

30,708.07

30,708.07

6,777.02

6,777.02
194,849.018

25,615.53

6,777.02
220,464.55

12-15
2.

Land, Building and Civil Works

The total land required for soya sauce production plant is 2000 m2. The total built up area
is estimated at 1500 m2. Out of the total built up area, 800m 2 will be used for production
facility, 400m2 for store and 300m2 for office building. The total cost of building and civil
works at the rate of birr 2300 per m2 is estimated at birr 3,450,000.
According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.
The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.
Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.
However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.
In Addis Ababa the Citys Land Administration and Development Authority is directly
responsible in dealing with matters concerning land.

However, regarding

the

12-16
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.
Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2. The land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the Citys Investment Authority.
However, if the land request is above 5,000 m2 the request is evaluated by the Citys
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.
The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the citys Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.
Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.
On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

12-17
Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Scored point
Above 75%
From 50 - 75%
From 25 - 49%

Grace
period
5 Years
5 Years
4 Years

Payment
Completion
Period
30 Years
28 Years
25 Years

Down
Paymen
t
10%
10%
10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.
Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 41.52 million of which 10% or Birr 4,152,000 will be paid in advance.
The remaining Birr 37.37 million will be paid in equal installments with in 28 years i.e.
Birr 1,334,571 annually.
VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The total manpower required is 43.This includes skilled and unskilled labor. As shown in
Table 6.1, the corresponding annual labor cost is estimated to be Birr 756,750.

12-18
Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOR COSTS
Sr.

Description

No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

Managing Director
Secretary of MD
Finance and Administration Head
Accountants
Personnel
Commercial Head
Sales personnel
Purchaser
Production Head
Shift leaders
Operators
Technique head
Mechanic
Electrician
Quality control head
Chemists
Drivers
Guards
Cleaners
Sub Total
Employees benefit(25% of basic
salary)
Total

B.

Req.

Monthly Salary

No.
1
1
1
2
1
1
2
1
1
1
16
1
2
2
1
2
2
2
3
43

[Birr]
4,000
1,000
3,000
3,000
1500
3,000
3,000
1,500
2,500
1,500
12,800
2,500
2,000
2,000
2,000
2,400
1,000
700
1,050

Annual Salary
[Birr]
48,000
12,000
36,000
36,000
18,000
36,000
36,000
18,000
30,000
18,000
153,600
30,000
24,000
24,000
24,000
28,800
12,000
8,400
12,600
605,400
151,350
756,750

TRAINING REQUIREMENT

On the job training can be arranged for those skilled labours who are mainly engaged on
production, quality control and technique departments. The total estimated training cost is
Birr 80,000.

12-19

VII.

FINANCIAL ANALYSIS

The financial analysis of the soya sauce project is based on the data presented in the
previous chapters and the following assumptions:Construction period

1 year

Source of finance

30 % equity
70 % loan

Tax holidays

3 years

Bank interest

8.5%

Discount cash flow

8.5%

Accounts receivable

30 days

Raw material local

10 days

Work in progress

3 days

Finished products

10 days

Cash in hand

5 days

Accounts payable

30 days

Repair and maintenance

5% of machinery cost

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at
8.93 million, of which 2 per cent will be required in foreign currency.
The major breakdown of the total initial investment cost is shown in Table 7.1.
Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
No.

Cost Items

Local
Cost

Foreign
Cost

Total
Cost

Birr

12-20
1

Land lease value

4,152.00

4,152.00

Building and Civil Work

3,450.00

3,450.00

Plant Machinery and Equipment

194.8
-

220.46

Office Furniture and Equipment

25.6
100.00

Vehicle

450.00

450.00

Pre-production Expenditure*

356.37

356.37

Working Capital

203.45

203.45

194.85

8,932.28

Total Investment cost

8,737.44

100.00

* N.B Pre-production expenditure includes interest during construction ( Birr 176.37

thousand), training ( Birr 80,000) and Birr

150

thousand costs of registration,

licensing and formation of the company including legal fees, commissioning expenses,
etc.

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 2.96
million (see Table 7.2).

The raw material cost accounts for 31.10 per cent of the

production cost. The other major components of the production utility, direct labour and
depreciation which account for

23.77 %,

12.25% and 12.04 % respectively. The

remaining 20.85 % is the share of repair and maintenance, labour overhead, financial cost
and other administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items
Raw Material and Inputs

Cost

921.97

31.10

12-21
Utilities
Maintenance and repair
Labour direct
Labour overheads
Administration Costs
Land lease cost
Total Operating Costs
Depreciation
Cost of Finance

704.75

23.77

11.02
363.24

0.37
12.25

151.35
242.16

5.10
8.17

2,394.49
356.9

80.76

213.6

7.20

2,964.94

100

12.04

Total Production Cost

C.

FINANCIAL EVALUATION

1.

Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 969.98 thousand to
Birr 1.01 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 12.48 million.
2.

Ratios

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

12-22

3.

Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.
BE =

Fixed Cost

31 %

Sales Variable Cost

4.

Payback Period

The pay back period, also called pay off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
projects 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 porject is computed to be 20.48 %
indicating the vaiability of the project.
6.

Net Present Value

12-23
Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value.

It is a

standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.
Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 3.35 million which is acceptable.
D.

ECONOMIC BENEFITS

The project can create employment for 43 persons. In addition to supply of the domestic
needs, the project will generate Birr 1.73 million in terms of tax revenue.

The

establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.