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16.

PROFILE ON TEJ PROCESSING

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TABLE OF CONTENTS
PAGE
I.

SUMMARY

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II.

PRODUCT DESCRIPTION & APPLICATION

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III.

MARKET STUDY AND PLANT CAPACITY


A. MARKET STUDY
B. PLANT CAPACITY & PRODUCTION PROGRAMME

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IV.

MATERIALS AND INPUTS


A. RAW MATERIALS
B. UTILITIES

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V.

TECHNOLOGY & ENGINEERING

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A. TECHNOLOGY
B. ENGINEERING

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VI.

MANPOWER & TRAINING REQUIREMENT


A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

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VII.

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

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I.

SUMMARY

This profile envisages the establishment of a plant for the bottling of tej with a capacity of
500,000 liters per annum.
The main raw material required is honey, which is available locally.
The present demand for the proposed product is estimated at 4.42 million liters

per

annum. The demand is expected to reach at 7.08 million liters by the year 2020.
The total investment requirement is estimated at Birr 6.68 million, out of which Birr 550
thousand is required

for plant and machinery. The plant will create employment

opportunities for 15 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 on the apiculture unit of the agricultural
sector.
II.

PRODUCTION DESCRIPTION AND APPLICATION

Tej is a favourite traditional drink in Ethiopia brewed from honey, local hops and water.
It is consumed at household level and in small Tej-pubs in urban area and in rural towns
as well. It is also highly consumed in ceremonies like wedding. It has also export
potential.
III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Tej is a favorite traditional drink in Ethiopia. It is widely consumed in most urban areas as
well as rural towns. The product has a growing local demand due to urbanization, and

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prospective export market to neighboring countries. The Country's requirement for tej
has been met through domestic production. However, data on domestic production and of
the product is not available. Data on domestic consumption of tej is not available either.
Therefore, demand for the product is estimated indirectly.
According to International Trade Centre (ITC) 2006, total estimate of honey production
for Ethiopia based on 65% and 75% occupational efficiency of 7.5 million traditional and
20 thousand framed improved hives respectively is estimated at 24,600 tones per year.
The same source reveals that of the total honey 60% is used for the production of tej and
according to knowledgeable sources a barrel of tej ( 200 litres) on average requires 33 kgs
of honey.
Accordingly, the total quantity of honey used for tej production annually is estimated at
14,760 tonnes which means the total annual tej production is about 88,560,000 litters.
The urban population is the predominant consumer of bottled tej. Moreover, with in the
urban population the target market for industrially bottled tej will be the upper income
group. Therefore, in order to be conservative it is assumed that bottled tej will replace
only 5% of the total estimated consumption of traditional tej. Thus the present demand for
bottled tej is estimated at 4,428,000 litres.
2.

Projected Demand

The consumption of tej is mainly associated with the urban population. Accordingly the
4% rate of urbanization is used in projecting the demand for the product. Table 3.1 depicts
the projected demand for the product.

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Table 3.1
PROJECTED DEMAND FOR TEJ (LITERS)

Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

3.

Projected
Demand
4,605,120
4,789,325
4,980,898
5,180,134
5,387,339
5,602,833
5,826,946
6,060,024
6,302,425
6,554,522
6,816,703
7,089,371

Pricing and Distribution

The retail price of good quality tej ranges from Birr 20 to Birr 25 per liter. Taking the
average retail price of Birr 25 per liter and allowing margin for retailers the envisaged
plant selling price is estimated at Birr 18 per liter. The envisaged plant can distribute its
product to restaurants, bars and tej-pubs.
B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

According to the market study, the demand of tej in the year 2009 will be 4,605,120 liters,
whereas this demand will grow to 8,625,303 liters by the year 2025. Taking only about
10% of the demand of the year 2011, the envisaged plant will have an annual production
capacity of 500,000 liters of Tej will be installed. Production capacity is based on a
schedule of 300 working days per annum and three shifts of eight hours per day.

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2.

Production Programme

The project is assumed to start operation at 80% of its rated capacity, which reaches 95%
of the rated capacity in the second year. Full capacity production will be attained in the
third year and thereafter. The production programme is indicated in Table 3.3.
Table 3.3
PRODUCTION PROGRAMME
Sr.
No.
1
2
3

IV.
A.

Product
Tej(in litres)
Wax(sefef)
Capacity utilization rate (%)

Production Programme
1
2
3-10
400,000
16
80

475,000
19
95

500,000
20
100

MATERIALS AND INPUTS


RAW MATERIALS

The direct and indirect material required by the project at 100% capacity utilization is
given in Table 4.1. The total annual raw material cost is estimated at Birr 5 million. The
major raw material honey is locally available abundantly from all over the country.
According to the International Trade Centre total honey production is estimated at 24,600
tonnes per annum. Of this total production, about 3,000 tonnes is exported annually.
Table 4.1
RAW MATERIALS AND INPUTS REQUIREMENT & COST
Sr.
No.
1
2
3

Description
Honey
Local hops
Packing material
Total

( bottles)

Qty. (Tonnes)

Unit Price
(Birr)

Cost
(Birr)

150
50
500,000

30,000
10,000
3

4,500,000
500,000
1,500,000
6,500,000

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B. UTILITIES
Utilities required by the envisaged plant are water and electricity. Annual estimated cost
of utilities at full capacity operation of the plant is given in Table 4.2.The total annual cost
of utilities is estimated at birr 30,458.
Table 4.1
ESTIMATED ANNUAL UTILITY COST
Sr.

Description

No.
1
2

Unit of

Annual

Measure Consumption
Electric power
Water
Total

kWh
m3

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

30,000
5000

Cost ('000
Birr)
14,208
16,250
30,458

The production process involves mixing, fermenting, filtration, filling, corking, labeling,
packing, and dispatching.
The required amount of honey and water are mixed in a mixing tank and then fermented
by adding yeast produced from previous operation. The fermented honey is aged for 1020 days by adding the required amount of hop. The aged tej is filtered, bottled, labeled
and packed. The filtered residue can be used for wax production. The process is
environmentally friendly.

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2.

Source of Technology

Tej is a traditional drink in Ethiopia as a result the technology of producing it will not be a
problem. Filling and packing machine and other machineries and equipments can be
obtained from the following machinery suppliers.
Shanghai Huichi packaging machinery Co.Ltd
Mobile:86-13761869629
Fax:86-21-66148371
Tel:86-21-36140513
B. ENGINEERING
1.

Machinery and Equipment

The plant machinery and equipment required by the plant are listed down in Table 5.1.
The total cost of machinery and equipment is estimated at Birr 550,000, out of which Birr
467,500 is required in foreign currency.
Table 5.1
MACHINERY AND EQUIPMENT REQUIRMENT AND COST
Sr.
No.
1
2
3
4
5
6
7
7

Description
Mixing tank
Wooden barrel, 300-lt
cap.
Plastic bucket, 25 lt cpa.
Heater
Hop grinder
Filter press
Collection Tank, SS,
2000 lt cap
Filling
and
sealing
machine
Total

Qty
Pcs

LC
3,750

Cost(Birr)
FC
21,250

TC
25,000

27,000
750
3,750
2,250
7,500

153,000
4,250
21,250
12,750
42,500

180,000
5,000
25,000
15,000
50,000

15,000

85,000

100,000

22,500
82,500

127,500
467,500

150,000
550,000

250
50
5 sets
1
1
5

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2.

Land , Building and Civil Works

The plant requires a total of 1000 m2 area of land out of which 800 m2 is built-up area
which includes processing area (350m2), raw material stock area (150m2), offices and
local selling (300m2) etc. Assuming construction rate of Birr 2500 per m 2, the total cost of
construction is estimated to be Birr 2,000,000.
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

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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 /m 2 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.
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
ayment
10%
10%
10%

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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 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years i.e.
Birr 667,286 annually.
VI. MANPOWER AND TRAINING REQUIREMENT
A.

MANPOWER REQUIREMENT

The annual labour cost of the project is estimated to be Birr 165,750. The list of labour
together with the corresponding salary cost is presented in Table 6.1.
Table 6.1
MANPOWER REQUIREMENT ANNUAL SALARY
Sr.
No.
1
2
3
4
5
6
7
8
9

Position
Plant manager
Secretary
Purchaser/sales man
Accountant
Operator technicians
Labourers
Store keeper
Guards
Driver
Sub-Total
Workers benefit (20% of Basic salary)
Grand Total

B. TRAINING REQUIREMENT

No. of
Persons
1
1
1
1
2
5
1
2
1
15
15

Salary ( Birr)
Monthly
Annual
3000
36,000
700
8,400
1500
18,000
1500
18,000
900
10,800
1750
21,000
500
6,000
700
8,400
500
6,000
132,600
33,150
165,750

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The technology of processing tej is simple and also the operators to be employed are with
the experience of tej processing. So traning is not required for the envisaged
project operation.

VII.

FINANCIAL ANALYSIS

The financial analysis of the tej bottling

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

3 days

Finished products

5 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
6.68 million, of which 7 per cent will be required in foreign currency.
The major breakdown of the total initial investment cost is shown in Table 7.1.

Birr

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Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
No.

Cost Items

Local
Cost

Forigin
Cost

Total
Cost

Land lease value

2,076.00

2,076.00

Building and Civil Work

2,000.00

2,000.00

Plant Machinery and Equipment

82.50

467.50

550.00

Office Furniture and Equipment

75.00

75.00

Vehicle

200.00

200.00

Pre-production Expenditure*

456.55

456.55

Working Capital

1,329.91

1,329.91

6,219.96

467.50

6,687.46

Total Investment cost

* N.B Pre-production expenditure includes interest during construction ( Birr 306.55


thousand , 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 7.20
million (see Table 7.2).

The raw material cost accounts for 90.27 per cent of the

production cost. The other major components of the production cost are financial cost and
depreciation which account for 3.40 % and 3.23 % respectively. The remaining 3.11 % is
the share of repair and maintenance, direct labour and other administration cost.

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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items
Raw Material and Inputs
Utilities
Maintenance and repair
Labour direct
Labour overheads
Administration Costs
Land lease cost
Total Operating Costs
Depreciation
Cost of Finance

Cost

6,500.00
30.46

90.27
0.42

27.50
53.04

0.38
0.74

33.15
79.56

0.46
1.10

6,723.71
232.50

93.37

244.56

3.40

7,200.77

100

3.23

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

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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

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

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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

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 15 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.73 million in terms of tax revenue. The
establishment of such factory will create a back ward linkage effect with apiculture unit
of the agricultural sector.
.

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