Direct cost (DC)

Costs of equipment + installation + instrumentation +piping+ electricity+ painting (50 -

60% of FCI)
 Purchased equipment cost (PEC) = 3,000,000

 Installation including painting (25-55% of PEC), take 40% of PEC = 1200000

 Instrumentation and control(6-30% of PEC), take 18% of PEC = 540000

 Piping (10-80% of PEC), take 15% of PEC = 450000

 Electricity (10-40% of PEC), take 25% of PEC = 750000

 Building, process and auxiliary ( 40-70% of PEC) , take 50% of PEC = 1500000

 Service facilities (40-100% of PEC), take 40% of PEC = 1200000

 Land (4-8% of PEC), take 4% of PEC = 120000

Direct cost is equal to the summation of all the above costs

DC = 8760000 birr

Indirect cost(IC)
 Engineering and supervision (5-30% of DC) we take 15% of DC = 1314000
 Construction expense and contractor fee (6-30% of DC) we take 18% of DC = 1576800
Contingency = 10% of FCI= 0.1*FCI

IC=1314000 + 1576800 + 0.1*FCI

Fixed Capital Investment (FCI) = total direct costs + total indirect costs

FCI=DC + IC = 8760000 + 1314000 + 1576800 + 0.1*FCI

= 116508800 + 0.1 FCI

FCI = 116508800/0.9 =129454222 birr
Total capital investment = fixed capital investment + working capital investment
TCI = FCI + WC
But for most plants the working capital investment=0.15(total investment cost)
Working Capital investment (WCI) = 15% of TCI
TCI=FCI + WCI
TCI=FCI+0.15(TCI)

TCI=FCI/0.85

= 129454222.22/0.85 = 152299085 birr

Total production cost (TPC) estimation

Total production cost estimation=manufacturing cost + general expense
Manufacturing cost=direct production cost + fixed charge + plant overhead cost

Fixed Charges (FC) = Fixed charge= depreciation + local taxes + insurance

 Depreciation = 10% FCI
= 0.1*129454222.22 =12945422 birr

 Local taxes (1-4%FCI) = 2.5% of FCI = 3236355

 Insurance (0.4-1%FCI) = 0.7% of FCI = 906179

Total Fixed charge (TFC) = 17087956 birr

Total Production cost (TPC)

FC = 15% of TPC
TPC = 113919706 birr

Direct Production cost (DPC)

1. Raw material and inputs: (10-50% of TPC) ,take 15% of TPC =17087956
2. Operating labor (OL): (10-20% of TPC), take 15% of TPC = 17087956
3. Direct supervisor and clerical labor: (10-25% of OL),take 18% of operating labor =
3075832
4. Utilities: (10-20% of TPC), take 15% of TPC = 17087956
 5. Maintenance and repair(M& R):(2-10% of FCI), take 6% of FCI = 7767253
6. Operating Supplies:(10-20% of M & R or 0.5-1% of FCI), take 0.75 % of FCI = 970906
7. Laboratory Charges: (10-20% of OL) we take 15% of OL= 2563193
8. Patent and Royalties:(0-6% of TPC) 3% of TPC = 3417591

Direct production cost (DPC) = 69058643 birr

Plant overhead cost (POC): (5-15% of TPC), take 10% of TPC = 11391970 birr

Manufacturing cost = FC + DPC + POC = 129454222 + 69058643 + 11391970

=209904835

General expense
General expense= Administrative costs + distribution and selling costs + research and
development costs + Financing (interest)

 Administrative costs (2-6% of TPC), take 4% TPC = 4556788

 Distribution and selling costs (2-20% of TPC), take 11% of TPC = 12531167

Research and Development costs = 5% total product cost= 5695985

Financing (interest) = 5% total capital investment = 7614954

Therefore, general expense = 71409194 birr

Profitability analysis

Production Capacity of the plant = 5000 liter/day=

The operating hours per day = 24 hr.

Operating days per year = 300 day

Production Capacity of the plant = 1500000

The selling price of oil in the market = 110/liter

There for annually total income = 1500000 x 110 = 165000000 birr.

Gross profit = product sales revenue–total product cost

Total profit (Gross income) = Total income cost – Total production cost
= 51080294 birr

Assume: salvage value = 0 and plant service life = 15 year.

Therefore depreciation cost = (fixed cost - 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 value) /service life

v−vs
Depreciation = = 17087956/15 = 1139197 birr
n

Gross profit including depreciation

165000000 – 113919706 – 1139197 = 49,941,097 birr

Net profit = gross profit with depreciation (1-Ø), where, Ø= income tax rate of Ethiopia =30%
N p= 49,941,097 *(1-0.3) = 34,958,768 birr

Rate of Return on Initial Investment (ROI)

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
ROI =
𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

= (34,958,768/152299085)*100 = 22.95%

ROI ≥ MAR(12%), 22.95% > 12%, so the project is feasible.

FCI−salvage value
Payback period = = 129454222-0/34,958,768 + 1139197 = 3.58year
net profit+depriciation

Break-even point analysis (BEP)

Breakeven point is the point when total annual production cost equals total annual sales. That is
the point where profit equals zero. The breakeven point is determined from the relation:

𝐓𝐏𝐂−𝐃𝐌𝐂
BEP = Where Sup=Selling price per unit of production
𝐒𝐮𝐩−𝐕𝐜𝐮𝐩
Vcup = Variable costs per unit of production
 𝒅𝒊𝒓𝒆𝒄𝒕 𝒎𝒂𝒏𝒖𝒇𝒂𝒄𝒕𝒖𝒓𝒊𝒏𝒈 𝒄𝒐𝒔𝒕
Vcup = = 69058643/1500000
𝒂𝒏𝒏𝒖𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚

= 46birr/liter
𝐓𝐏𝐂−𝐃𝐌𝐂
BEP = = 113919706 – 69058643 / 110- 46 = 700954 liter/year
𝐒𝐮𝐩−𝐕𝐜𝐮𝐩