PROFILE ON POTATO FLOUR AND FLAKES
I. Summary
This profile envisages the establishment of a plant for the production of potato flour and flakes with a capacity of 32,000 kg per annum. Potato flour and flakes are used as breakfast and snack food. Moreover, the products are also used as an ingredient in bakery, pastry, biscuits and other sweet productions.
The main raw material required for producing potato flour and flake is potato, which is available locally.
The present demand for the proposed product is estimated at 35,000 kg per annum. The demand is expected to reach at 63,000 kg by the year 2020.
The total investment requirement is estimated at Birr 4.83 million, out of which Birr 2.358 million is required for plant and machinery. The plant will create employment opportunities for 18 persons.
The project is financially viable with an internal rate of return (IRR) of 16.30% and a net present value (NPV) of Birr 1.31 million, discounted at 8.5%.
The project will have a backward linkage effect with potato growers. The establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports.
Potato flour and flakes are most popularly used as breakfast and snack food, which contains important nutrient, carbohydrate, as a source of energy for human diet. It is used as an ingredient in bakery, pastry, biscuits and other sweet productions.
III. MARKET STUDY AND PLANT CAPACITY
A. MARKET STUDY
1. Past Supply and Present Demand
Potato flour and flakes are becoming a popular breakfast and snack food. The country's requirement for the products has been met through imports. Table 3.1 shows the amount of potato flour and flakes imported during 1997-2006. As can be seen from the information depicted in the Table, imports of the product has exhibited a fluctuating trend from year to year. Imports of the product which was 1,249 kg during 2001 has increased by 187% to 3,588 kg in 2002. However, in 2003 import has decreased by 68% compared to 2002 level of import. In year 2004 and 2005 import has increased by 34% and 175% respectively compared to previous years and in 2006 import has decreased by 55% compared to 2005. However, during the period 2001 – 2006 import has registered an average annual growth rate of 54%.
Table 3.1
IMPORTS OF POTATO FLOUR AND FLAKES (KG)
Year | Imports |
2001 | 1,249 |
2002 | 3,588 |
2003 | 1,139 |
2004 | 1,521 |
2005 | 4,182 |
2006 | 1,873 |
Source: Customs Authority, External Trade Statistics, 2001-2006.
As can be seen from the above Table during the period 2001 – 2006 the average annual apparent consumption of potato flour and flakes was 2.25 tonnes. The main reason for the low level of consumption is unavailability of local production which has lead to higher prices due to the transport and other costs associated with importing the products. However, if the product is produced locally and the necessary promotion on the nutritive value of the products is undertaken potato flour and flakes will be consumed by most of the urban population.
Therefore, in order to estimate the potential demand for potato flour and flakes the following assumption are employed.
- The city of Addis Ababa has an estimated population of about 2.8 million. The average number of persons per household is five. Therefore, the total number of households in Addis Ababa is 560,000.
- The target group for potato flour and flakes are those households that earn an annual income of Birr 20,000 and above.
- According to CSA’s “ Income, Consumption and Expenditure Survey”, 2001 at national level the proportion of households with an annual income of Birr 20,000 and above is 20%. However, regarding Addis Ababa the proportion of households with an income of Birr 20,000 and above is assumed to be slightly higher than the national level, i.e., 25%.
- The annual per capita consumption of potato flour and flakes by the target group is 250 grms per household.
Accordingly, based on the above assumptions the present demand for potato flour and flakes is estimated at 35,000 kg or 35 tonnes.
2. Projected Demand
The demand for potato flour and flakes will increase with growth of population, income and awareness creation about the nutritive value of the products. The combined effect of these factors is expected to result with an increase of demand by 5% annually ( which is slightly higher than the growth rate of urban population). Accordingly, taking the estimated potential present demand for the products as a base and applying a growth rate of 5% the projected demand for potato flour and flakes is shown in Table 3.2.
Table 3.2
PROJECTED DEMAND FOR POTATO FLOUR AND FLAKES (TONNES)
Year | Projected Demand |
2009 | 37 |
2010 | 39 |
2011 | 41 |
2012 | 43 |
2013 | 45 |
2014 | 47 |
2015 | 49 |
2016 | 52 |
2017 | 54 |
2018 | 57 |
2019 | 60 |
2020 | 63 |
3. Pricing and Distribution
Currently, it should be noted that price is a major factor among the marketing mix that gives competitive edge over competitors with respect to food items in the country. The product under discussion is thus to be supplied at a relatively lower price than that of substitutes e.g. similar food preparations from wheat.
Accordingly, the ex-factory price of Birr 50/kg and Birr 25/kg for potato flakes and flour respectively is taken for the purpose of revenue calculation.
The products under consideration are food items and as such the suitable means of taking them from the producer to the final consumer is through specialized food item department stores, general merchandizing shops and super markets.
B. PLANT CAPACITY AND PRODUCTION PROGRAMME
1. Plant Capacity
Based on the market study the production capacity of the envisaged potato flour and flakes production plant is 32,000 kg per year. The plant is expected to work for 288 days per annum in a single shift of 8 hours per day.
2. Production Programme
The annual production programme is formulated on the basis of the market forecast and selected plant capacity. It is proposed that the plant will produce 25% potato floor and 75% potato flakes. It is assumed that the plant 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 potato flour and flakes is shown in Table 3.3.
Table 3.3
PRODUCTION PROGRAMME
Sr. No. | Description | Production Programme | ||
1st year | 2nd year | 3rd -10th year | ||
1 | Capacity utilization rate [%] | 70 | 85 | 100 |
2 | Potato flakes production [kg/year] | 16,800 | 20,400 | 24,000 |
3 | Potato flour[kg/year] | 5,600 | 6,800 | 8,000 |
IV. MATERIALS AND INPUTS
A. RAW AND AUXILIARY MATERIALS
The major raw material in production of potato flour and flake as the name indicates is raw potato. Potato is abundantly available in the neighboring regions. Input to out put ratio of raw potato: Flour or flake is 5.7:1. Therefore, the annual required raw potato during full plant capacity utilization is 198,264 kg with 10% waste or spoilage consideration. Polyethylene bag is used for packing potato flour in 500gm and 1kg packages in equal amounts (50% each).The annual raw material and polyethylene consumption and estimated cost is shown in Table 4.1.
Table 4.1
ANNUAL RAW MATERIAL REQUIREMENT AND COST ESTIMATES
Sr. No. | Description | Quantity | Raw Material Spoilage/Damaged/ Wasted (10%) | Total Raw Material Amount Per Year | Unit Price Per Kg [Birr] | Total Price [Birr] |
1 | Raw Potato | 180,240 (kg) | 18,024 | 198,264 | 3 | 594 792 |
2 | Polyethylene bag(500gm) | 8,000 (pieces) | 800 | 8800 | 0.25 | 2200 |
3 | Polyethylene bag(1kg) | 4,000 (pieces) | 400 | 4400 | 0.4 | 1760 |
Grand Total | 598,752 | |||||
The main auxiliary material in potato flakes production is waxed paper bag, carton box, and scotch tape. These packing materials are available locally.
- Waxed Paper bag
The packaging material selected is food grade waxed paper bag with a capacity designed to fit different types of customers (individuals, hotels, wholesalers etc…) that is, 250gm and 500 gm. Since the 250 gm is fast moving due to its being easy to handle from storage point of view (since it is small quantity, once open it won’t stay long). Out of the total production quantity 70% will hold for 250gm package and 30% will be for 500gm one. Annual requirement with total costs is shown in Table 4.2.
Table 4.2
ANNUAL WAXED PAPER REQUIREMENT AND ITS COST ESTIMATES
Sr. No. | Packaging Capacity [Gm] | Total Product Production Per Year [Kg/Yr] | Number of Paper Bags Required | Waste Allowance 2% | Total Number of Paper Bag Required | Unite Price [Birr] | Total Cost [Birr] |
1 | 250 | 16,800 | 67,200 | 1,340 | 68,540 | 0.3 | 20,562 |
2 | 500 | 7,200 | 14,400 | 290 | 14,690 | 0.5 | 7,345 |
Grand Total | 27,907 | ||||||
- Carton box
The required carton box to pack the two types of paper bags should be designed for suitable handling, stable structure, efficient space utilization etc. The annual required quantity and cost of ideal carton box size which is suitable to pack the two types of paper bag at 100% capacity utilization rate of the plant is given in Table 4.3.
Table 4.3
ANNUAL REQUIREMENT OF CARTON BOX AND COST ESTIMATE
Packaging Capacity Gm] | Number of Paper Bags Per Box Lxwxh | Carton Size Lxwxh [Cm] | Amount of Product Per Box [Kg] | Annual Production [Kg] | Carton Box Per Annum | 5 % Waste | Total Carton Box Required | CB Unit Price [Birr] | Total Price [Birr] |
250 | 3x3x4=36 | 30x24x20 | 9 | 22,400 | 2,500 | 130 | 2,630 | 3.75 | 9,862.5 |
500 | 3x2x4=24 | 45x20x20 | 12 | 9,600 | 800 | 40 | 840 | 4.0 | 3,360.0 |
Grand Total | 13,222.5 | ||||||||
- Scotch tape
The estimated scotch tape amount and its cost at 100% capacity utilization rate is given in Table 4.4.
Table 4.4
ANNUAL REQUIREMENT OF SCOTCH TAPE AND COST ESTIMATE
Packaging Capacity [Gm] | Carton Box Per Annum | Length Of Scotch Tape Needed to Seal One Carton* [M] | Length of Scotch Tape Neede Per Yr [M] | Estimated Waste Amount [0.5%) [M] | Total Length of Scotch Tape Needed [M] | Length of One Role Scotch Tape [M] | Required Number of Roles | Unit Price of One Role [Birr] | Total Price of Roles [Birr] |
250 | 2,630 | 0.8 | 2104 | 105.2 | 2,210 | 18 | 130 | 25 | 3,250 |
500 | 840 | 1.10 | 924 | 46.2 | 970 | 18 | 60 | 25 | 1,500 |
Grand Total | 4,750 | ||||||||
* 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 and water are the three major utilities for production process of potato flour and flakes. 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/Year | Unit Cost [Birr] | Total Cost |
1 | Electricity | kWh | 20,000 | 0.4736 | 9,472 |
3 | Water | m3 | 15,000 | 3.25 | 48,750 |
Grand Total | 58,222 | ||||
V. TECHNOLOGY AND ENGINEERING
A. TECHNOLOGY
1. Production Process
The main process steps in the production of Potato flour and flakes are described as follows.
- Potato Flour
The potatoes from local farmers are transported to a factory by trucks, then the potatoes are washed, peeled in a batch peeler, blanched, rasped in to fine particles in a rotating grater, the juice and solid matter are separated in to two streams in a rotary decanter. Then fresh water is added to the stream of solid matter and pulp is separated from the starch by centrifugation. Flour will be refined in hydro cyclones and vacuum filters. Finally the concentrated slurry will be dried in a warm air stream until the final water content of 20% and the flour will be packed and ready for distribution.
- Potato flakes
In the production process of potato flakes, the raw material preparation is similar with that of potato flour production. The difference is the potatoes after peeling and cutting they will be cooked instead of blanching. Then, the cooked potatoes will be mashed and dried, grinded to have uniform particle size distribution. Finally the product will be packed and ready for distribution.
The yield ratio of potatoes to flakes and flour is approximately 5.7:1. Higher recovery ratio of flour and flakes is from fresh potatoes and lower recovery ratio from stored potatoes.
Potatoes with high solid contents and lower sugar are best to produce such dehydrated products.
The process of production of potato flour and flakes is environmentally friendly since the only waste is peel of potato which will be used as compost (natural fertilizer).
- Source of Technology
Machinery and technology for production of potato flour and flakes can be obtained from a number of suppliers, world wide. Dornow Food Technology of Germany can be contacted in this respect at E-mail: office@dornow.de, Fax: +49-211-596883.
B. ENGINEERING
1. Machinery and Equipment
The total cost of machinery and equipments estimated to be Birr 2,358,000, out of which Birr 2,004,300 will be required in foreign currency. Detail list of machinery and equipment and their cost estimates are given in Table 5.1.
Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND ESTIMATED COST
Sr. No. | Description | Qty | Unit Cost [Birr] | Total Cost [Birr] | ||
F.C | L.C | TC | ||||
1 | Collecting potato bunker, with automatic outlet system | 1 | 70,740 | 60,129 | 10,611 | 70,740 |
2 | Washing unit with belt conveyor | 1 | 165,060 | 140,301 | 24,759 | 165,060 |
3 | Potato batch peeling unit | 1 | 70,740 | 60,129 | 10,611 | 70,740 |
4 | Inspection belt conveyor | 1 | 23,580 | 20,043 | 3,537 | 23,580 |
5 | Collecting bunker with feed in belt conveyor | 1 | 47,160 | 40,086 | 7,074 | 47,160 |
6 | Blanching unit | 1 | 94,320 | 80,172 | 14,148 | 94,320 |
7 | Rotary grater | 1 | 141,480 | 120,258 | 21,222 | 141,480 |
8 | Decanter centrifuge | 1 | 235,800 | 200,430 | 35,370 | 235,800 |
9 | Vacuum filter | 1 | 282,960 | 240,516 | 42,444 | 282,960 |
10 | Cooking unit(flakes) | 1 | 165,060 | 140,301 | 24,759 | 165,060 |
11 | Mashing unit (flakes) | 1 | 117,900 | 100,215 | 17,685 | 117,900 |
12 | Drying unit | 1 | 330,120 | 280,602 | 49,518 | 330,120 |
13 | Heat exchanger | 1 | 259,380 | 220,473 | 38,907 | 259,380 |
14 | Packing unit | 1 | 353,700 | 300,645 | 53,055 | 353,700 |
Grand Total | 2,004,300 | 353,700 | 2,358,000 | |||
2. Land, building and Civil Works
The total land required for potato flour and flakes production plant is 500 m2. The total built up area is estimated at 250 m2. Out of the total built-up area, 130m2 will be used for production facility, 80m2 for store and 40m2 for office building. The total cost of building and civil works at the rate of birr 2300 per m2 is estimated at birr 575,000.
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 City’s Land Administration and Development Authority is directly responsible in dealing with matters concerning land. However, regarding the manufacturing sector, industrial zone preparation is one of the strategic intervention measures adopted by the City Administration for the promotion of the sector and all manufacturing projects are assumed to be located in the developed industrial zones.
Regarding land allocation of industrial zones if the land requirement of the project is blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone Development and Coordination Committee of the City’s Investment Authority. However, if the land request is above 5,000 m2 the request is evaluated by the City’s Investment Authority and passed with recommendation to the Land Development and Administration Authority for decision, while the lease price is the same for both cases.
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 city’s 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 m2 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.
Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS
Scored Point | Grace Period | Payment Completion Period | Down Payment |
Above 75% | 5 Years | 30 Years | 10% |
From 50 - 75% | 5 Years | 28 Years | 10% |
From 25 - 49% | 4 Years | 25 Years | 10% |
For the purpose of this project profile the average, i.e., five years grace period, 28 years payment completion period and 10% down payment is used. The 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 m2, is estimated at Birr 10.38 million of which 10% or Birr 1,038,000 will be paid in advance. The remaining Birr 9.34 million will be paid in equal installments with in 28 years, i.e., Birr 333,643 annually.
VI. MANPOWER AND TRAINING REQUIREMENT
A. MANPOWER REQUIREMENT
The total manpower required is 18.This includes skilled and unskilled labour. As shown in Table 6.1, the corresponding annual labour cost is estimated at Birr 255,000.
Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOR COST
Sr. No. | Description | Req. No. | Monthly Salary [Birr] | Annual Salary [Birr] |
1 | Managing Director | 1 | 3,000 | 36,000 |
2 | Secretary of MD | 1 | 900 | 10,800 |
3 | Accountants | 1 | 1,500 | 18,000 |
4 | Sales/purchase man | 1 | 1,500 | 18,000 |
5 | Production Head | 1 | 2,000 | 24,000 |
6 | Shift leaders | 1 | 1,000 | 12,000 |
7 | Operators | 3 | 2,400 | 28,800 |
8 | Mechanic | 1 | 800 | 9,600 |
9 | Electrician | 1 | 800 | 9,600 |
10 | Chemist | 1 | 900 | 10,800 |
11 | Driver | 1 | 450 | 5,400 |
12 | Guard | 2 | 700 | 8,400 |
13 | Cleaner | 3 | 1,050 | 12,600 |
Sub Total | 18 | 204,000 | ||
Employees benefit(25% of gross salary) | 51,000 | |||
Total | 255,000 |
B. TRAINING REQUIREMENT
On the job training can be arranged for those skilled labourers who are mainly engaged on production, quality control and technique departments. The total estimated training cost is Birr 20,000.
VII. FINANCIAL ANALYSIS
The financial analysis of the potato flour and flakes 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 .............30 days
Work in progress ..............1 days
Finished products............. 30 days
Cash in hand ...................5 days
Accounts payable ............30 days
Repair and maintenance ....3% of machinery cost
A. TOTAL INITIAL INVESTMENT COST
The total investment cost of the project including working capital is estimated at Birr 4.84 million, of which 41 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)
Cost Items | Local Cost | Foreign Cost | Total Cost |
Land lease value | 1,038.00 | - | 1,038.00 |
Building and Civil Work | 575.00 | - | 575.00 |
Plant Machinery and Equipment | 353.70 | 2,004.30 | 2,358.00 |
Office Furniture and Equipment | 75.00 | - | 75.00 |
Vehicle | 250.00 | - | 250.00 |
Pre-production Expenditure* | 419.83 | - | 419.83 |
Working Capital | 122.94 | - | 122.94 |
Total Investment Cost | 2,834.47 | 2,004.30 | 4,838.77 |
* N.B Pre-production expenditure includes interest during construction ( Birr 269.83 thousand), training (Birr 20 thousand ) and Birr 120 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 1.58 million (see Table 7.2). The cost of raw material account for 39.89% of the production cost. The other major components of the production cost are depreciation, financial cost and direct labour which account for 22.24 %, 13.60% and 7.73 %, respectively. The remaining 16.53 % is the share of utility, repair and maintenance, labour overhead and administration cost.
Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items | Cost | % |
Raw Material and Inputs | 631.41 | 39.89 |
Utilities | 58.22 | 3.68 |
Maintenance and repair | 70.74 | 4.47 |
Labour direct | 122.40 | 7.73 |
Labour overheads | 51.00 | 3.22 |
Administration Costs | 81.60 | 5.16 |
Land lease cost | - | - |
Total Operating Costs | 1,015.37 | 64.15 |
Depreciation | 352.05 | 22.24 |
Cost of Finance | 215.27 | 13.60 |
Total Production Cost | 1,582.69 | 100 |
C. FINANCIAL EVALUATION
1. Profitability
Based on the projected profit and loss statement, the project will generate a profit through out its operation life. Annual net profit after tax will grow from Birr 180.63 thousand to Birr 526.81 thousand during the life of the project. Moreover, at the end of the project life the accumulated cash flow amounts to Birr 5.27 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.
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 = 34 %
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 project’s 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 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 16.30 % indicating the vaiability 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 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 1.31 million which is acceptable.
D. ECONOMIC BENEFITS
The project can create employment for 18 persons. In addition to supply of the domestic needs, the project will generate Birr 1.31 million in terms of tax revenue. The establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports. The project will have a backward linkage effect with potato growers
No comments:
Post a Comment