10.1. Financial Analysis of the project 10.1 Estimation total Sales
The financial projections are made for a period of ten years. Total sales revenues of the project are determined based on various criteria that consists types of products sold, total quantities of products sold, and selling prices of the products. As per the detail machinery specifications provided by the selected supplier, the subject plant is envisaged to have 20 ton/day (TPD) oil milling line at installed capacity.
The overall plant system is designed with especial features that enable the production of edible oil from various types of oil seeds such as Niger seed, soybean, cotton seed, and sunflower. The technology selected offers greater opportunity to produce edible oils from any of the given oil seeds variety based on the prevailing market situation. Taking into account the current market demand, raw materials availability and future prospects, the subject project is planned to produce edible oil of Niger seed and cotton seed at a product mix ratio of 35% and 65%, respectively. The larger production proportion of edible oil production will of cotton seed oil due to availability of the raw materials in the market in abundance.
The project under consideration when it is at operation generates income mainly from two business activities: sales of refined edible oil and by-products (oil cake). The oil is sold to the general public for cocking food whereas the oil cake will sold to commercial livestock farms such as dairy, poultry, and fattening farms.
25 At installed capacity utilization the envisaged project is planned to generate Birr 96.69 million.
Considering the existing high demand for edible oil in the market, the plant is proposed to start at capacity utilization rate of 70% in the initial year and with 5% increment per annum the project is expected to reach maximum attainable capacity of 95% in the sixth year.
10.1.1. Production plan and Revenue projection 10.1.Profit/loss statement
As per the projected profit and loss statements, the project is planned to generate a net income of Birr 3.1 million in the first year which is projected to grow to Birr 12.8 million in the tenth year.
The profit of the project expected at its initial investment period is taken as reasonable in view of various project implementation aspects and influences.
10.2.Cash Flow Statement
The project shall add values and generate positive cash flow throughout the ten consecutive years and it is also expected bring higher cash inflows in future periods of the business. During these periods, it generates an average net profit of Birr 9.11 million. The business is projected to register a net cash flow of Birr 2.78 million in the first year that will grow to a cumulative net cash flow of Birr 36.19 million in the tenth year. This shows its ability to meet its obligations on time, effectively and efficiently. All in all, the project is liquid throughout its life.
10.3.Balance Sheet
Assets of the envisaged project s are naturally the total initial investment at the beginning year.
Whereas, the liabilities constitute Birr 48.1 million of long term loan at end of the first year that makes up 70% of total assets or capital invested for the project, and no balance of liabilities shall appear at the end of the ninth year.
Throughout the business life, the project creates additional values as it is financially strong and can settle its obligations through the added value. Through the operational life it builds up its own capital which is expected to rise to Birr 84 million at end of 10th year.
Net Present Value:-The net present value (NPV) as discount rate of 10% is nearly Birr 10.46million indicating that investment in the business venture is recommendable.
Internal Rate of Return:-A commercial profitability analysis indicates that the plant will generate a reasonable rate of return. The internal rate of return (IRR) for the project after and before tax is expected to be 23% and 26%, respectively. The Financial Internal Rate of Return both after and before income tax is higher than the economic rate of return of about 11%. This indicates that the project is financially viable one.
10.4 Sensitivity Analysis
The previous sections provided an analysis of the proposed venture in static form and with strict assumptions of unchanged parameters. This section explores the impact upon net income when a
26 single parameter is allowed to vary while all others are held constant. The most significant factor impacting net income is the price received for refined edible oil. Revenue received from edible oil sales represents 83.35% of the total revenue stream. The remaining income i.e. about 16.65% of total income comes from sales by-products (or oil cakes). The business model can withstand some volatility in the market. In this regard, based on the test made the project can sustain a 10%
decrease in income while the operating costs are remain constant with 14% and 12% IRR before and after tax, respectively. Similarly, a 10% increase in operating costs while revenue remain constants yield IRR of 16% and 14% before and after tax, respectively.
The major challenges of the edible oil processing plant in Ethiopia today is the ever increasing cost of raw materials (oils seeds) and the stagnant selling price of the final products. Though the government has not directly imposed price ceiling on local oil producers being the major consumable items in every household it is somewhat very difficult to raise price since it creates popular uproar. To withstand this situation, the company should purchase adequate stock of raw material during harvesting seasons and store to be able to compensate the higher purchase costs during the rest seasons of the production year.
o Employees’ benefits assumed to be about 25% of wages and salaries o Per diem assumed to be at least about 0.1% of revenue
o Promotion expense assumed to be a least about 0.2% of revenue
o Insurance expense assumed to be about 0.05% of value of assets of the factory o Repair and insurance assumed to be about 0.02% of fixed assets
Depreciation and Amortization
Description Depreciation Rate
Building and Construction 5%
Machinery and Equipment’s 20%
Vehicles 20%
Office furniture and Equipment’s 20%
Pre operating expenses 20%
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