A MODEL GARMENT PRODUCING ENTERPRISE TO BE ESTABLISHED … Feasibility... · 7 Band Knife 2 3,800...

A MODEL GARMENT PRODUCING ENTERPRISE TO BE ESTABLISHED IN

HAWASSA INDUSTRIAL PARK

FEASIBILITY STUDY

June 2016

This document presents the feasibility of a model domestic garment enterprise that is to be

established in a 5,500 m2 shed in the HIP.

1

A MODEL GARMENT PRODUCING ENTERPRISE TO

BE ESTABLISHED IN HAWASSA INDUSTRIAL

PARK

(FEASIBILITY STUDY)

June 2016

2

Table of Contents EXECUTIVE SUMMARY ................................................................................................................ 3

I. INTRODUCTION ......................................................................................................................... 5

II. BASIC TECHNICAL CONSIDERATIONS ........................................................................... 8 2.1. Location ....................................................................................................................................... 8 2.2. Machinery and Equipment ...................................................................................................... 8 2.3. Auxiliary Equipment ............................................................................................................... 11 2.4. Vehicles Requirement ............................................................................................................. 12 2.5. Furniture and Equipment ....................................................................................................... 12 2.6. Production Capacity and Plan ............................................................................................... 13 2.6.1. Installed (Designed) Production Capacity ....................................................................... 13 2.6.2. Planned Capacity Utilization & Production Program.................................................... 14 2.7. Raw Material and Accessories Requirement ...................................................................... 14 2.8. Packing Material Requirement ............................................................................................. 16 2.9. Availability of Utilities: .......................................................................................................... 17 2.10. Garment Production Process................................................................................................ 18

III. ORGANIZATION, MANAGEMENT AND MANPOWER REQUIREMENT ........... 23 3.1. Organizational Structure ........................................................................................................ 23 3.2. Management.............................................................................................................................. 24 3.3. Manpower.................................................................................................................................. 24

IV. FINANCIAL ANALYSIS ........................................................................................................ 27 4.1. Initial Investment Cost ........................................................................................................... 27 4.2. Source of Investment Cost ..................................................................................................... 28 4.3. Expected Financial Results ..................................................................................................... 29 4.3.1. Revenue Estimation .............................................................................................................. 29 4.3.2. Production Costs ................................................................................................................... 30 4.3.3. Profitability ............................................................................................................................ 31 4.3.4. Cash flow/Liquidity ............................................................................................................. 32 4.3.5. NPV and Financial Internal Rate of Return..................................................................... 33 4.3.6. Sensitivity Analysis .............................................................................................................. 33 4.4. Socioeconomic Benefits .......................................................................................................... 34

V. CONCLUDING REMARKS .................................................................................................... 36 APPENDIX ...................................................................................................................................... 38

3

EXECUTIVE SUMMARY

As stipulated in the Second Growth and Transformation Plan (GTP II) of the country, the

Ethiopian government has given utmost emphasis on ensuring fast and sustained growth in the

industrial sector. The importance of boosting industrial investment both by foreign and domestic

investors is underscored and particular attention is given to the growth of the domestic private

sector in general and the manufacturing sector in particular.

To facilitate the planned industrialization process, the government has designed various policies

and strategies; a case in point is the huge investment by the government on the development of

industrial parks. Through the industrial parks development program, the government of Ethiopia

intends to create favorable conditions for private sector investment, especially for the

manufacturing sector. Accordingly, a number of industrial parks are being built in different parts

of the country at a very fast rate. By avoiding the need to develop industrial areas, industrial

parks save capital and time for investors. The industrial parks will also include integrated

services like customs, banking and insurance. The fact that many enterprises will be located at

the same place will have the added advantage of economies of scale and agglomeration. A model

industrial park is being built in Hawassa and is expected to be completed soon. All the sheds of

the Hawassa Industrial Park (HIP) are rented except those which are designated for domestic

investors. While attracting foreign investors to the industrial parks is important for employment

generation, export promotion, and technology and knowledge transfer, for a sustainable growth

of the industrial sector it is also essential to have domestic investors in the industrial parks.

Accordingly, the government is planning to introduce an attractive incentive package to

encourage domestic investors to join the industrial parks and produce manufactured products for

the export sector.


established in a 5,500 m2 shed in HIP. The total investment cost of the model enterprise is

estimated to be Birr 89 million of which 50% will be allocated for fixed investment, 48% for

working capital and 2% for pre-operating costs. The enterprise will produce two types of

products; namely, Polo-shirts and Shirts. It will have a total daily production capacity of 11,900

pieces with a product mix of 41% and 59% for Polo-shirts and Shirts respectively. The enterprise

4

will create jobs for 830 people. The project is financially viable; it will realize a net profit of Birr

3.9 million and Birr 38 million during the first and tenth projection years respectively. The

incentives proposed by the government for such enterprises contributed significantly for the high

profit levels. It is also important to note that this appraisal depends on an important assumption

that the enterprise will not have any problem in finding a market for its products. While support

in terms of finding an export market for such enterprises will be part of the broad incentive

package, it is extremely important that this issue gets due attention.

5

I. INTRODUCTION

Ethiopia has a vision of becoming a lower-middle income country by 2025, and industry is

expected to play huge role in achieving that. As is underscored in the GTPII, a special emphasis

is given to some manufacturing sectors based on the competitive advantages of Ethiopia;

garment is one of the sectors that are given priority.

Ethiopia has huge potential for garment industry and the global market is also conducive for the

sector. Due to the increase in world population and the growing middle class in many parts of the

world, including Africa and Asia, the demand for garment products is on the rise. Countries

which are known for exporting garment products like China and India are also becoming less

competitive globally primarily due to the rise in cost of labor. Ethiopia, on the other hand, has

huge and cheap labor force making labor intensive manufacturing sectors like garment industries

more attractive. Ethiopia is also located strategically close to various markets including Africa,

Asia and Europe. Furthermore, Ethiopian made products enjoy preferential treatments to various

markets including the European Union market under the Everything But Arms (EBA) initiative

and to the US market under the African Growth and Opportunity Act (AGOA).

The Ethiopian government has also given huge emphasis on encouraging investment in the

manufacturing sector in general and the garment sector in particular. It has significantly

improved the investment condition, is heavily investing in infrastructure (roads, railways,

electricity etc) and has designed attractive incentives. As part of the strategy to encourage

investment, the government is developing various industrial parks with modern infrastructure.

Industrial parks save time and capital by avoiding the need to develop industrial areas by

investors. The industrial parks will also make doing business easier by providing fast and reliable

integrated services like customs, banking and insurance.

A model industrial park is being built in Hawassa and is expected to be completed. All the sheds

of the HIP are rented except those which are designated for domestic investors. Recognizing the

importance of domestic investors for knowledge and technology transfer and sustainable growth

of the industrial sector, the government is planning to provide a special and attractive incentive

package for domestic investors with the capacity and experience to produce textile products for

the export market. Some of the proposed incentives include:

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- Investment loan: up to 85% of the capital required for the enterprise can be acquired

from the Development Bank of Ethiopia (DBE). The current long process of securing

loan will also be revised such that it takes only two months to conclude the

transaction.

- Tax exemption: There will be various tax exemptions including a total income tax

exemption of up to seven and ten years respectively for those operating in Addis

Ababa (and its surroundings) and outside. They will also be allowed to import capital

goods and raw materials free of duty.

- Capacity building: The government will cover part of the recruitment and training

cost of man power and salary of expatriates hired by the enterprises.

- Fast and efficient service delivery: There will be a customs office in the park. Full

banking and insurance services will also be available.

- Market network and linkage with foreign investors: The government will facilitate

linkages between domestic and foreign investors.


established in a 5,500 m2 shed in the HIP and the purpose is twofold. First, it tests the feasibility

of a domestic enterprise that can potentially join the industrial park in light of the attractive

incentive package proposed by the government. As such, it can serve as a showcase for potential

domestic investors anticipating to join the industrial park. Second, it can serve as a basis for a

model bankable project where by a selected garment enterprise will use a modified version of

this feasibility study to acquire loan from government banks without the usual process of

appraisal. But for this document to be used for model banking, more work is needed, especially

in terms of marketing research. It is also worth noting that the details (e.g., the product types to

be produced) may not be in line with the interest of the potential investor and hence may need

revision. In preparing this feasibility study, both primary and secondary sources were employed.

The primary sources include interviews and discussions with relevant industrialists, experts and

suppliers, while the secondary sources include documents of similar feasibility studies and

reports.

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The total investment cost of the enterprise is estimated to be Birr 89 million of which 50% will

be allocated for fixed investment, 48% for working capital and 2% for pre-operating costs. The

enterprise will produce two types of products; namely, Polo-shirts and Shirts. At full capacity, it

will produce 11,900 pieces per day with a product mix of 41% and 59% for Polo-shirts and

Shirts respectively and will export 100% of its products. The enterprise will create jobs for 830

people. The project is financially viable; it will realize a net profit of Birr 3.9 million and Birr 38

million during the first and tenth projection years respectively.

8

II. BASIC TECHNICAL CONSIDERATIONS

2.1. Location

Location plays an important role for the feasibility and overall profitability of an enterprise. The

model enterprise will be located in HIP in a shed of 5,500 m2. The rent per month per m

2 is set to

be USD 2 for the first four years, USD 2.5 for the fifth, sixth and seventh years; and USD 2.75

for the 8th

to the 10th

years.

The enterprise will take advantage of being located in the park; it will save time and capita

needed to develop an industrial area and get better services. Hawassa is also a strategic town

with sufficient labor force, educational institutions and better infrastructure among other things.

2.2. Machinery and Equipment

The project will have different types of garment machineries required for cutting, sewing and

finishing processes. The aggregate cost of machinery and equipment is estimated to be Birr 33.4

million of which Birr 4.4 million is cost of cutting, spreading and designing machineries, Birr

26.9 million is cost of sewing machineries and Birr 2 million is cost of finishing machineries.

The detail is presented in the following subsequent tables.

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Table 2.1: Machinery & Equipment: Cutting, Spreading and Design

Sr.

No. Machine Type

Total

Quantity

Required

Unit Price

in USD

Total

Price in

USD

Brand/

supplier

1

AUTOMTIC FABRIC SPREADER ''590 E-70KG-220'' FOR

KNIT, CPS CUTTING DEVICE WITHOUT CATCHER,

SIEMENS PLC TOUCH SCREEN CONTROL PANEL,

PLATEFORM FOR FOLDED FABRICS WITH MOTORIZED

SYSTEM

2 27,500 55,000 FK GROUP

2 AIR FLOTATION TABLS FROM ITALY, BLOWING TABLE

BY FK (22M*10) WORKING WIDTH:220CM, 220METER 2 9,680 19,360 FK GROUP

3 Pattern 3 plotter 3 software keys 1 85,550 85,550 GERBER

4 Straight knife 7 1,050 7,350 EAST MAN

5 Ply numbering guns 5 98 490 JUKI

6 End cutters 2 4,000 8,000 EAST MAN

7 Band Knife 2 3,800 7,600 NAGAI HING

Sub-total in USD 21

183,350

Other Costs (9.25% of FOB Price)

16,960

Total Cost in USD

200,310

Total Cost In Birr

4,440,169

Note: When calculating total cost, the following additional costs were included: Cost of freight (2.25%), Insurance

(0.75%), Bank charge (3%), and Local Costs (Port Handling, Loading, Unloading, Clearing and Forwarding, Local

Transport etc) of 3.25 %) FOB price were considered and included in birr equivalent. The following exchange rates

were used to convert the costs to Birr: USD = 22.1665, Euro = 24.9507.

10

Table 2.2: Machinery & Equipment:Sewing

Sr.

No. Machine Type

Total

Quantity

Required

Unit

Price

in USD

Total

Price in

USD

Brand /supplier

1

1 needle chain stitch , blind stitch machine

with skip stitch device and universal throat

plate/manual thread cutter - CB-641/T003

1 1,130 1,130 JuIki

2 3th Over lock (MO-6704S-0A5-150) 15 795 11,925 Juki India plc

3 4th Over lock (MO-6714S-BE6-44H/ G

39/Q141 43 810 34,830 Juki India plc

4 5th Over lock(MO-6716S-DE4-40H/E35) 5 871 4,355 Juki India plc

5 Bar tack (LK-1900BSS/MC-670KSS) 3 3,735 11,205 JuKI

6 Button Hole Machine ( LBH-1790AS/MC-

602KS) 42 4,750 199,500 JuKI

7 Button Sew Machine ( LK-

1903BSS301/MC670K) 42 2,865 120,330 JuKI

6 FUSING PRESS WITH AUTOMATIC

BALANCING SYSTEM 2 2,358 4,716

AL BORJ MACHINERY

LLC

10

DNLS with Top Center Plait Folder/Cloth

Puller/Tape

Reel(LH3120AQ/M315/V053B/R006/R001)

15 2,960 44,400 JuKI

11 FIT ( Flat ironing table) 114 1,010 115,140 NAOMOTO

12 FOA ( Heavy Duty) (MS-1261MF/V045S) 1 2,300 2,300 JUKI SINGAPORE PTE

LTD

13 FOA ( Light Duty) (MS-1190MF/V046R) 14 2,300 32,200 JUKI SINGAPORE PTE

LTD

14 Helper Table 57 23 1,294 Local

17 SNLS Edge Trimmer ( DLM-5200ND ) 30 2,750 82,500 JuKI

18 SNLS-UBT ( DDL-8100BM-7-WBK) 467 524 244,708 JuKI

19 Top & Bottom Cover stitch Machine (Cyl

Bed) ( MF-7923D-U11-B56) (3 N, 5 Th) 15 3,402 51,030 JuKI

20 Top & Bottom Cover stitch Machine

(Flatbed) ( MF-7523-U11-B56) (3 N, 5 Th) 29 2,668 77,372 JuKI

21 Elastic Attaching Machine(6-Needle) 2 2,336 4,672 JuKI

22

TAJIMA COMPUTERIZED

EMBROIDERY MACHINE,TAIJIMA

MODEL:TFGNII-918 9 COLOR 18

HEADS WITH EMBROIDERY AREA OF (

800 X 400)S

1 68,212 68,212 TAJIMA

Sub-total in USD 898 105,799 1,111,819


102,843

Total Cost in USD

1,214,663

Total Cost In Birr

26,924,823





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Table 2.3: Machinery & Equipment:Finishing

Sr.

No. Machine Type

Total

Quantity

Required

Unit

Price in

USD

Total Price

in USD Brand /supplier

1

IRONING TABLE

(900MM*1300MM), WITH OUT

SWING ARM AND ANY BUCKS

and MODEL HSL-620, ALL STEAM

IRON WITH 2.5M STEAM TEFLON

20 1,010 20,200 NAOMOTO

2 Pressing Machine MPRP 44 7 5,448 38,138 Rimoldi

3 TWIN HEAD, CONVEYOR TYPE

NEEDLE DETECTOR 1 18,840 18,840

AL BORJ MACHINERY

LLC

4 HEAT TRANSFER PRESS 2 2,585 5,170 AL BORJ MACHINERY

LLC

Sub-total in USD 30 27,883 82,348


7,617

Total Cost in USD

89,966

Total Cost In Birr

1,994,225





2.3. Auxiliary Equipment

In addition to the main machinery and equipment, there are also other auxiliary equipment which

are necessary for the smooth functioning of the factory; they include compressor, boiler, water

treatment plant, generator, CCTV and fabric inspection machines. The total cost of the auxiliary

equipment is Birr 5.49 million. The cost breakdown is provided in Table 2.4 below.

Table 2.4: Auxiliary Equipment Sr. No. Type Total Qty Unit Price USD Total Price in USD Brand

Auxiliary Equipment

1 Screw air compressor, GA55FF 3 31,000 93,000 Atlascopco

2 Boiler for Iron 1 7,400 7,400 NAOMOTO

3 Supply of water softening Plant 1

16,000 16,000 KPL International

Limited

4 Generator 450 KVA 1 53,575 53,575 Green power

5 CCTV 1 24,389 24,389

6 Knitted fabric inspection

machine 2

7,400 14,800

SUNTECH

INDUSTRIAL

7 Woven fabric inspection

machine 2

8,700 17,400 New Bhagavati Eng

Sub-total in USD

148,464 226,564

Other Costs (9.25% of FOB

Price)

20,957

Total Cost in USD

247,522

Total Cost In Birr

5,486,690

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2.4. Vehicles Requirement

The vehicle types required include Toyota Hilux Pickup double cabin, ISUZU FSR, Service Bus,

Forklift and Trolley with an estimated total cost of Birr 4.05 million. The detail is given below.

Table 2.5: Vehicles

DESCRIPTION QUANTITY UNIT PRICE IN BIRR TOTAL PRICE IN BIRR

ISUZU NPR 1 782,609 782,609

DAEWOO BUS 1 1,900,000 1,900,000

HYUNDAI BATTERY FORKLIFT 1 30,000 664,995

TOYOTA HILUX 4WD PICK UP 1 680,000 680,000

TROLLEY 4 5,830 23,319

TOTAL 4,050,923

Note: The prices don’t include duty

2.5. Furniture and Equipment

The cost for furniture and equipment is estimated considering the size of manpower required for

actual production and management. The furniture and equipment will be procured locally and the

estimated total cost is Birr 1.39 million. See Table 2.6 below for the breakdown.

Table 2.6: Furniture & Equipment Sr. No. Description Unit Quantity Unit Price in Birr Total Price in Birr

Furniture

1 EXCUTIVE TABLE PCS 1 13,479 13,479

2 HIGH BACK CHAIR PCS 1 5,479 5,479

3 MEDIUM BACK CHAIR PCS 5 2,261 11,305

4 STANDARD TABLE PCS 5 4,696 23,480

5 FILLING CABINET PCS 2 5,131 10,262

6

SINGLE PEDESTAL TABLE

140X80X75 WITH THREE FIXED

DRAWER PCS 3 2,367 7,101

7

REVOLVING CHAIR: IMPORTED

HIGH QUALITY REVOLVING CHAIR

WITHOUT ARM REST IN FABRIC PCS 700 1,478 1,034,600

8 Bundling table PCS 2 16,493 32,986

9 Final Inspection Table(5 ' X 3 ') PCS 28 2,199 61,573

10 Trimming Table (Wire Meshed) PCS 28 550 15,393

11 Folding table 10 meter PCS 4 16,493 65,971

SUB-TOTAL 1,281,629

Equipment

1 Dell Optiplex 7010 PCS 5 12,499 62,495

2 INTEX 1050VA UPS-IT-1050V PCS 5 2,088 10,440

3 Hp LaserJet P2055d-printer PCS 3 3,290 9,870

4 Canon 2420 digital photo Copy machine PCS 1 23,478 23,478

5 Scanner G2710 HP PCS 2 2,200 4,400

SUB-TOTAL 110,683

TOTAL 1,392,312

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2.6. Production Capacity and Plan

2.6.1. Installed (Designed) Production Capacity

The capacity of a garment factory is primarily determined by the total machines owned, size of

space available and the level of manpower skill. The factory may produce various types of

products with different capacity by making changes to the machinery layout. According to the

product type, machine requirement may change and daily average production in each type may

vary. Depending on the simplicity of the product type and improvement in operators’

productivity, production capacity can be increased.

However, for the purpose of technical and financial analysis, the envisaged model factory is

assumed to produce two product types namely; Polo-shirt and Shirt with a production mix of

41% and 59% respectively. Given the space available for operation and utilizing the latest semi-

automated technologies, the factory will have a production capacity of 11,900 pieces of garment

per day.

Assuming 300 net working days (after deducting holidays and maintenance time) and a single

shift operation of eight hours, the factory will have a capacity of producing 3,570,000 (1,470,000

pieces of Polo-shirt and 2,100,000 pieces of Shirts). Taking into account the difficulty of

garment production at night, only single shift operation is considered.

Moreover, since production capacity of garment factory is highly dependent on operator’s

performance, the average attainable Ethiopian machine operator’s performance is taken into

consideration to determine the overall capacity of the envisaged plant. Table below shows the

summary of the production at full capacity.

Table 2.7: Production at 100% Capacity

Product

Type UoM Percentage Mix

Production

Capacity/Day

Production

Capacity/annum

Polo shirts Pcs 41% 4,900 1,470,000

Shirt Pcs 59% 7,000 2,100,000

Total 100% 11,900 3,570,000

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2.6.2. Planned Capacity Utilization and Production Program

Due to different limiting factors, like operators’ skill, industry experience and availability of raw

material and utilities, it will not be possible to achieve the installed production of the factory at

early years of operation.

It is assumed that the production capacity utilization rate in the first year will be 50% and will

increase by 10% annually and reach the maximum of 90% in the fifth year of operation (the

capacity utilization will be 90% for the rest of the project’s life). The initial capacity utilization

rate is set to 50% based on the current average capacity utilization of similar factories. However,

at later operational years, due to modern training and effective management and experience in

the industry, the average productivity and hence capacity utilization of the factory is expected to

increase by 10% annually.

Table 2.8: Yearly Production Plan

Project Year

Planned

Capacity

Utilization

Rate

Production/annum @ Planned Capacity

Utilization Rate

Polo Shirt Woven Shirt Total

Production/annum

Year-1 50% 735,000 1,050,000 1,785,000

Year-2 60% 882,000 1,260,000 2,142,000

Year-3 70% 1,029,000 1,470,000 2,499,000

Year-4 80% 1,176,000 1,680,000 2,856,000

Year-5 & then after 90% 1,323,000 1,890,000 3,213,000

2.7. Raw Material and Accessories Requirement

The basic raw materials used for the production of the planned garment products include fabrics,

printed label, sticker, button and sewing threads. The quality of these raw materials determines

the quality of the outputs directly. In the garment industry, quality control starts right from the

initial stage of sourcing raw materials and goes to the final finished garment packing stage. Thus,

to satisfy the quality requirement of export markets, the envisaged factory will use raw materials

of high quality. Currently, it is difficult to find high quality raw materials from domestic

markets; hence in the short-run the factory will import all the raw materials and accessories from

countries like China, Italy, Germany, Thailand and Turkey. This weakens the linkage effect of

the factory and also increases the foreign currency demand of the country; in the long run,

15

emphasis should be made to improve the quality of locally produced raw materials and

accessories for the garment industry.

As part of government incentive, raw materials will be imported free of any duty and tax which

is important for the competitiveness of the factory. Table 2.9 below shows the raw material and

accessories cost at full capacity for each product mix. At 100% capacity, the total cost of raw

material and accessories is estimated to be Birr 172.93 million per annum.

16

Table 2.9: Raw Material & Accessories Cost at 100% Capacity

Sr. No. Description UoM Quantity

Required/Unit

Quantity Required

@ 100% Capacity

Unit Price in

USD

Total Price in

USD

Polo Shirt Production

1 100 % Cotton, Single Jersey kg 0.20 294,000 6.30 1,852,200

2 Rib kg 0.05 73,500 6.45 474,075

3 Neck band pcs 1.00 1,470,000 0.04 58,800

4 barcode printed label pcs 1.00 1,470,000 0.01 14,700

5 barcode sticker pcs 1.00 1,470,000 0.03 44,100

6 brand label pcs 1.00 1,470,000 0.01 14,700

7 button 4 hole 16 mm pcs 3.00 4,410,000 0.02 88,200

8 clips 20cm pcs 2.00 2,940,000 0.01 29,400

9 Hang tag pcs 1.00 1,470,000 0.04 54,390

10 care label Pcs 1.00 1,470,000 0.04 58,800

11 stitching yarn (for sewing ) kg 0.01 20,580 0.78 16,052

12 soft interline meter 0.05 73,500 0.51 37,485

Sub-Total

2,742,902

Cost of Freight (3%FOB)

82,287

Foreign Cost Sub-Total

2,825,189

Birr Equivalent

62,624,562

Other Local Costs (6.25% of FOB

Price)

2,736,025

Total Cost in Birr

65,360,587

Shirt (woven) production

1 100 % Cotton, Plain weave meter 1.20 2,520,000 1.50 3,780,000

2 Neck band pcs 1.00 2,100,000 0.04 84,000

3 barcode printed label pcs 1.00 2,100,000 0.01 21,000

4 barcode sticker pcs 1.00 2,100,000 0.03 63,000

5 brand label pcs 1.00 2,100,000 0.01 21,000

6 button 4 hole 16 mm pcs 1.00 2,100,000 0.02 42,000

7 clips 20cm pcs 7.00 14,700,000 0.01 117,600

8 Hang tag pcs 2.00 4,200,000 0.04 168,000

9 care label pcs 1.00 2,100,000 0.04 77,700

10 stitching yarn (for sewing ) kg 0.02 42,000 0.78 32,760

11 soft interline meter 0.10 210,000 0.51 107,100

Sub-Total

4,514,160

Cost of Freight (3%FOB)

135,425

Foreign Cost Sub-Total

4,649,585

Birr Equivalent

103,065,021

Other Local Costs (6.25% of FOB

Price)

4,502,841

Total Cost in Birr

107,567,862

Grand Total Cost

172,928,449

2.8. Packing Material Requirement

Apart from proper handling and distribution of the products from the factory to distribution

centers, packing also serves the purpose of providing information about the product that anybody

17

can understand easily; i.e., packing can serve as a marketing instrument and hence should get due

emphasis. The major packing materials to be used are Carton, Shirt Supporter, Collar Supporter,

Pins and Butterfly. All the packing materials will be procured locally. The cost of packing

materials at full capacity is estimated to be Birr 8.27 million per annum.

Table 2.10: Cost of Packing Material at 100% Capacity

Packing Material Type Total Packing Material

Requirement-in Pcs Unit Price (Birr) Total Cost (Birr)

Cartoon 93,333 20 1,866,667

Shirt Supporter 2,100,000 1.5 3,150,000

Collar Supporter 2,100,000 0.55 1,155,000

Pins & others 23,100,000 0.05 1,155,000

Butterfly 2,100,000 0.45 945,000

Total Cost

8,271,667

2.9. Availability of Utilities:

Water

The estimated water requirement for drinking, sanitation and production process (washing and

some printing process) at full capacity is 9,531m3 per annum and at a unit cost of Birr 9.30 per

m3, the total cost will be Birr 88,641 per annum.

Electricity

At full capacity, the estimated electricity requirement for production process and other general

purposes is 599,760 kwh per annum, which costs Birr 349,790 (at Birr 0.58 per kwh).

Other Utilities

Fuel, Oil and Lubricants are also required for operation of the vehicles and the backup power

supply generator. Annually, the factory is estimated to consume 72,643 liters of oil at full

capacity. At a cost of Birr 16 per litter, the total cost for fuel, oil and lubricants is estimated to be

Birr 1.28 million per annum. While, the total utilities expense is Birr 1.72 million.

18

Table 2.11: Summary of Utility Cost at 100% Capacity

Sr. No. Utility Items Annual Requirement

@ 100% Capacity Unit Price (Birr)

Total Cost

(Birr)

1 Electric power 599,760 kwh 0.58 349,790

2 Water 9,531.25 m3 9.30 88,641

3 Fuel 72,642.86 liters 16 1,162,286

4

Oils & Lubricants (10%

of fuel cost)

116,229

Total 1,716,946

2.10. Garment Production Process

Garment manufacturing is an organized activity consisting of sequential process such as laying,

marking, cutting, stitching, checking, finishing, pressing and packaging. On industrial basis there

are certain areas or sequence through which garments are manufactured and the detail production

sequence/process is presented as follows (while the production lay-out plan is given in the

appendix);

Design / Sketch

In garment manufacturing, the first step is designing the sketch for the items that have to be

prepared. For this purpose the designer first draws several rough sketches in the sketch book.

Later these sketches are analyzed by a panel of designers. They finally select a few out of them.

The few sketches are rendered in detail separately or in the form of a single collection. The

designer also draws working drawings along with the sketch.

Pattern Design

The pattern maker develops the first pattern for the designs in a standard size. This is made by

pattern drafting method and the purpose of making this pattern is to create the sample garment

for test fit.

Sample Making

The first patterns are sent to the sewing unit to be assembled into a garment. This is usually

stitched on calico or muslin which is an inferior quality fabric. This sample is constructed to

analyze the pattern fit and design. After the sample garment is stitched it is reviewed by a panel

of designers, pattern makers and sewing specialists and necessary changes are made.

19

Production Pattern

The pattern design will be taken to create the production patterns which will be used for huge

production of garments. The patterns are made on standard pattern making paper which is made-

up of various grades.

Grading

The purpose of grading is to create patterns in different standard sizes. Grading a pattern is

scaling a pattern up or down in order to adjust it for multiple sizes. Pattern sizes can be large,

medium or small and there are also standard patterns of size 10, 12, 14, 16 and so on for different

figure and stature sizes. This is generally how we get S M L XL XXL sizing.

Marker Making

The measuring department determines the fabric yardage needed for each style and size of

garment. Computer software is used to create the optimum fabric layout. Markers, made in

accordance to the patterns are attached to the fabric with the help of adhesive stripping or staples.

Markers are laid such that minimum possible fabric gets wasted during cutting operation. After

marking the garment, the manufacturer will get the idea of how much fabric needs to be ordered

in advance for the production of garments. Therefore, careful execution is important in this step.

Spreading

With the help of spreading machines, fabric is stacked on one another in reaches or lays that may

go over 100 ft (30.5 m) long and hundreds of plies (fabric pieces) thick.

Cutting

The fabric is then cut with the help of cloth cutting machines suitable for the specific type of

cloth. These can be band cutters (similar to ban saws), cutters with rotary blades, machines with

reciprocal blades, die clickers (similar to die or punch press) or computerized machines that use

either blades or laser beams to cut the fabric in desired shapes.

Sorting/Bundling

The sorter sorts the patterns/cut-parts according to size and design and makes bundles of them.

This step requires much precision because making bundles of mismatched patterns can create

20

severe problems. On each bundle there are specifications of the style size and the marker is also

attached with it.

Sewing/Assembling

The sorted bundles of fabrics are now ready to be stitched. In this workplace, there are many

operators who participate in a single operation. One operator may make only straight seams,

while another may make sleeve insets. Yet other two operators can sew the waist seams, and

make buttonholes. Various industrial sewing machines can also make different types of stitches.

These machines have different configuration of the frame. Some machines work sequentially and

feed their finished step directly into the next machine, while the gang machines have multiple

machines performing the same operation supervised by a single operator. All these factors decide

what parts of a garment can be sewn at that station. Finally, the sewn parts of the garment, such

as sleeves or pant legs, are assembled together to give the final form to the clothing.

Inspection

Open seams, wrong stitching techniques, non- matching threads, and missing stitches, improper

creasing of the garment, erroneous thread tension and raw edges are some of the sewing defects

which can affect the garment quality adversely. During processing, the quality control section

needs to check each prepared article against these defects.

Pressing/ Finishing

The next step is finishing and/or decorating. Molding may be done to change the finished surface

of the garment by applying pressure, heat, moisture or certain other combination. Pressing,

pleating and creasing are the basic molding processes. Creasing is mostly done before other

finishing processes like that of stitching a cuff and before decorating the garment with something

like a pocket, appliqués and embroidered emblems. Vertical and form presses is an automated

machine that performs simple pressing operations, such as touching up wrinkles in knit shirts,

around embroidery and snaps, and at difficult-to-reach places on garments.

Final Inspection

At this stage, inspection on the quality of the products is done. Product quality is calculated in

terms of quality and standard of fibers, yarns, fabric construction, color fastness, designs and the

final finished garments. Quality control in terms of garment manufacturing, pre-sales and posts

21

sales service, delivery and pricing are essential. Quality related problems like sewing, color,

sizing or garment defects should not be overlooked.

Packing:-The finished garments are finally sorted on the basis of design and size and

packed for distribution to the retail outlets.

22

Figure 2.1: Garment Production Process Flow

Design

Sketch

Pattern Design

Sample making

Production Pattern

Grading

Marker Making

Inspection

Spreading

Cutting

Sorting/Bundling

Sewing/Assembling

Pressing

Finishing

Final Inspection

Packing Dispatching

23

III. ORGANIZATION, MANAGEMENT AND MANNPOWER

REQUIREMENT

3.1. Organizational Structure

A well-structured organizational management system is one of the success factors of an

enterprise. The decision-making process, coordination between different units and the

communication process are determined by the nature of the adopted organizational structure

which affects the overall efficiency and performance of the enterprise.

The enterprise is expected to have the following organizational structure which is functional and

production based. At the top, there will be a General Manager followed by four department

managers for Administrative and Finance, Production and Technical, Marketing and Supplies;

and Planning and MIS departments. Under each department there will be divisions to effectively

and efficiently operate the activities of the factory. The detail of the Organizational structure

(Organogram) is given as follows:

General Manager

Administrative&

Finance Dep’t

Production and

Technical Dep’t

Marketing

Research &

Dev’t Section

Production

Section

Marketing & supplies Dep’t

Technical

Section

General Service

Section

Supplies Section Personnel section

Finance Section

Maintenance

Section

Quality control

Section

Sales Section

Planning & MIS

Dep't

MIS

Planning

24

3.2. Management

Management is one of the key success factors of any enterprise. Even though all other required

facilities are available, without efficient management, the enterprise will not be successful and

cannot achieve its objectives. As per the organizational structure, the enterprise is expected to

hire qualified managers with the necessary experience and managerial quality. The department

managers are expected to be at least first degree holders with sufficient relevant experience in the

garment sector. See the following table.

Table 3.1: Minimum Qualification and Experience of Proposed Management

Sr. No. Management Position No.

Required

Minimum Qualification & Experience

Minimum Qualification Experience

1 General Manager 1

BA degree in

management, Economics

& related field

Minimum of 8 years of

relevant experience

2 Administrative & Finance Dep’t 1

BA degree in

management or any

related field


relevant experience

3 Production &Technical Dep’t 1 BSC degree in textile

engineering


relevant experience

4 Planning & MIS Dep't 1

BA degree in

Economics, Management

& related field


relevant experience

5 Marketing & supplies Dep’t 1 BA degree in marketing Minimum of 6 years of

relevant experience

3.3. Manpower

Garment industry is labor intensive where use of quality labor is the most determining success

factor. Availability of training is also crucial to improve productivity, speed and management. In

Ethiopia, though there is abundant labor, quality is a big problem. There is scarcity of designer,

pattern maker and marketing professionals with higher education.

The manpower requirement of the enterprise is estimated to be 834 personnel including

managers and operators on a permanent basis. Operators are skilled and semi-skilled employees

working in different positions. Of the total manpower, 4 are expatriates with special technical

skills and are expected to serve for the first four years; after the fourth year of operation they will

be replaced by domestic employees. See table below for the detail manpower requirement:

25

Table 3.2: Summary of Manpower Requirement

Sr. No. Department/Section No. Required

Local Expatriates Total

I General Manager Office 3 - 3

II Production and Technical Dep’t

Department Manager 1

1

Design Section 6 1 7

Cutting Section 39 1 40

Sewing Section 685 1 686

Finishing Section 42 1 43

Engineering Section 4 - 4

Quality Control Section 12 - 12

Sub-total 789 4 793

III Planning & MIS Dep't 5 - 5

IV Administration & Finance Dep’t


1

HRM & Admin Section 14 - 14

Finance Section 6 - 6

Sub-total 21 - 21

V Marketing & Supplies Dep’t

-


1

Marketing Section 6 - 6

Supply Section 8 - 8

Sub-total 15 - 15

Total 830 4 834

As labour is a highly valued asset in garment industry, the enterprise is assumed to pay

competitive salary and benefit packages. The government will also cover part of expatriate salary

as part of the incentive package. Of the total salary cost of Birr 18.41 million in the first year of

operation, the enterprise is expected to pay Birr 16.24 million while an amount of Birr 2.17

million will be covered by the government. Moreover, the enterprise is assumed to pay about

20% of the basic salary as a benefit package.

26

Table 3.3: Salary and Wages

Description Year-1 Year-2 Year-3 Year-4 Year-5

Local Labour 15,855,000 16,647,750 17,480,138 18,354,144 19,271,852

Foreign Labour 2,553,581 2,553,581 2,553,581 2,553,581 0

Total Cost 18,408,581 19,201,331 20,033,718 20,907,725 19,271,852

Government Share of Foreign

Labour Cost (%age) 85% 75% 50% 25% 0%

Government Share Foreign Labour

Cost (Birr) 2,170,544 1,915,186 1,276,790 638,395 -

Company’s Foreign Labour Cost

(Birr) 383,037 638,395 1,276,790 1,915,186 -

Total Cost to the Company 16,238,037 17,286,145 18,756,928 20,269,330 19,271,852

The garment sector is fashion oriented and there is continuous improvement and dynamism in

the technology; thus, training is crucial to be competitive. To this end, the government will

provide the necessary training and support aimed at improving the productivity and efficiency of

local workers. Training will be conducted in collaboration with the Ethiopian Textile Industry

Development Institute (ETIDI) and other sectorial associations. A training center is expected to

be set in the industrial park, equipped with the necessary materials and facilities including the

required human resource. At the initial stage, there will be intensive training programs and

majority of the cost (up to 85%) will be covered by the government. However, starting from the

second year (till the tenth year), the training cost will decrease as training is expected to be given

only to new and some existing employees. For the detail see table 3.4 below.

Table 3.4: Training Cost

Description Project Years

Year-1 Year-2 Year-3 Year-4 Year-5

Training on Designing, pattern making, Cutting, Sewing, Quality Control, Machine Application etc

No. of Trainee 799 320 320 320 320

Average Training Cost/Head in Birr 5,000 5,250 5,513 5,788 6,078

Total Training Cost 3,995,000 1,677,900 1,761,795 1,849,885 1,942,379

Government Support (%age) 85% 75% 50% 25% 0%

Government Support (Birr) 3,395,750 1,258,425 880,898 462,471 0

Training Cost to the Company in Birr 599,250 419,475 880,898 1,387,414 1,942,379

27

IV. FINANCIAL ANALYSIS

4.1. Initial Investment Cost

The total initial investment cost of the enterprise is estimated to be Birr 88.68 million. Of the

total investment requirement, Birr 44.29 million (50%) is investment on fixed physical assets

which includes main machinery and equipment, auxiliary equipment, vehicles; and furniture and

office equipment. The working capital requirement is estimated to be Birr 42.91 million (48%)

and the remaining Birr 1.48 million (2%) will cover pre-production cost including pre-

production interest. Pre-production costs are costs to be incurred before commencement of

operation which includes cost of feasibility study, licensing, consultancy, salary and wages,

utilities, rents and the like, while pre-production interest is capitalized interest that accrues

during implementation phase of the project. For the detail, see the following table.

Table 4.1: Total Initial Investment Cost

Sr. No. Investment Items Local Cost (Birr) Foreign Cost

(Birr)

Total Cost

(Birr)

1

Fixed Investment

Main Machineries 2,084,951 31,274,265 33,359,216

Vehicles 4,050,923 - 4,050,923

Auxiliary Equipment - 5,486,690 5,486,690

Furniture and Equipment 1,392,312 - 1,392,312

Sub-Total 7,528,186 36,760,955 44,289,141

2 Working Capital 15,890,369

27,020,070 42,910,440

3 Pre-Production Costs

Pre-production Cost 544,997

544,997

Pre-production Interest 938,189

938,189

Sub-Total 1,483,187 - 1,483,187

Grand Total 24,901,742 63,781,025 88,682,767

Percentage 28% 72% 100%

Of the total investment cost, 72% (equivalent of Birr 63.78 million) is estimated to be spent in

foreign currency and only Birr 24.90 million (28%) of the total investment will be expended in

local currency. The equivalent of Birr 36.76 million of foreign currency is required for initial

procurement of machinery and equipment and the equivalent of Birr 27.02 million is required for

procurement of raw materials and accessories for initial operational year.

28

Investment on working capital is relatively high (which covers 48% of the total investment) due

to absence of fixed investment on building and construction, longer stockholding periods

(considering the period required for importing) and the high price of imported raw materials. The

major portion of working capital is cost of raw material followed by finished product inventory,

receivables, work-in progress and wages and salary. For details see table 4.2 below.

Table 4.2: Initial Year Working Capital Requirement in Birr

Description W/C Requirement

Period Cost in Initial Year

Raw material Cost 4 months 28,821,408

Packing Material 1 month 344,653

Utilities Cost 1 month 18,268

Wages & salaries 1 month 1,353,170

Employee Benefits 1 month 270,634

Travelling & Perdiem 1 month 135,317

Office Supplies 1 month 29,578

Uniform & Clothing 6months 197,000

Postal,Telephone,Telex etc 1 month 11,831

Miscellaneous Expense 1 month 50,000

Medical & Related Expenses 1 month 135,317

Marketing & Promotional Cost 1 month 59,157

Service Bus Rental Cost 1 month 100,000

Building Rental Cost 1 month 243,832

Training Cost Annual 599,250

Fuel & lubricant Cost 1 month 53,271

Spare parts & consumables 4 month 571,958

Insurance Annual 765,610

Product Transportation Cost 1 month 44,045

Work in-Progress 5 days 1,580,006

Finished Product 10 days 4,213,351

Receivable 7 days 3,312,783

Total Working Capital 42,910,440

4.2. Source of Investment Cost

Of the total investment cost of Birr 88.68 million, Long-term Bank loan (seven years) is

expected to cover Birr 75.38 million (85%). The remaining Birr 13.3 Million (15%) is expected

to come in the form of owners’ equity contribution; the debt-equity ratio is 85% to 15% and is

based on the proposed incentive package intended for industrial park enterprises. The maximum

debt-equity ratio currently applicable in the government banks for local investors is 75% to 25%.

29

However, since lending banks have their own credit policy, the proposed loan arrangements may

not go in line with the credit policy of banks. For instance, the Development Bank of Ethiopia

(DBE) requires a collateral coverage of at least 100%, where usually the value of the fixed asset

of the project covers the total amount of the loan. In the case of this model project, the collateral

coverage is only about 59%, mainly due to low fixed investment required and the high debt-

equity ratio. Hence, making necessary revisions and preparations in consultancy with the

financiers is important.

Table 4.3: Source of Finance of the Project (Structure of fund allocation)

Description Bank loan Owner's Equity Total

Fixed Investment

Main Machineries 27,479,389 5,879,827 33,359,216

Vehicles 4,050,923 - 4,050,923

Auxiliary Equipment 5,377,716 108,974 5,486,690

Furniture and Equipment

1,392,312 1,392,312

Sub-Total 36,908,028 7,381,113 44,289,141

Working capital 38,472,325 4,438,115 42,910,440

Pre-production Cost

Pre-production Cost - 544,997 544,997

Pre-production Interest - 938,189 938,189

Sub-Total - 1,483,187 1,483,187

Grand Total 75,380,352 13,302,415 88,682,767

Debt-Equity Ratio 85% 15% 100%

4.3. Expected Financial Results

4.3.1. Revenue Estimation

The enterprise is assumed to export 100% of its produce and that requires detailed marketing

study. The enterprise is expected to target existing markets for Ethiopia’s apparel products like

USA and Germany. It should also take advantage of existing preferential treatments like AGOA

and EBA and look into new market destinations. The grounds to create export market network

and linkage will be facilitated by the government as part of the broader incentive package.

30

Therefore, it is assumed that finding an export market will not be a problem. This is an important

assumption and requires due attention. The enterprise will export 100% of its produce.

To check the viability of the business, current actual prices obtained from similar enterprises is

employed. See the following table for the detail.

Table 4.4: Prices Considered for Financial Analysis

Product Type Export Price in USD

Polo shirt 3.00

Shirt 4.00

Taking these prices and production at the planned capacity utilization rate, the enterprise is

expected to generate total revenue of Birr 141.98 million in the first year. The revenue is

projected to increase by 10% each year until the 5th

year as per the increment in the capacity

utilization rate.

Table 4.5: Estimated Revenue by Year

Project Year Capacity Utilization Revenue @ Capacity

Utilization Rate

Year-1 50% 141,976,433

Year-2 60% 170,371,719

Year-3 70% 198,767,006

Year-4 80% 227,162,292

Year-5 & then after 90% 255,557,579

4.3.2. Production Costs

The total production cost is estimated to Birr 138 million for the initial year and reaches Birr 214

million at the fifth year when the maximum capacity utilization rate is achieved. Raw material

cost covers the major portion of production cost accounting for 63% of production costs

followed by salary and employee benefit. As part of the incentive package, the enterprise will not

incur any tax and duty on imported raw materials. Moreover, the enterprise incurs only a portion

of expatriate salary and training costs as government covers the costs partially until the 4th

year

of operation.

31

Table 4.6: Estimated Production Costs


1 2 3 4 5

Raw material Cost 86,464,225 103,757,070 121,049,914 138,342,759 155,635,604

Packing Material 4,135,833 4,963,000 5,790,167 6,617,333 7,444,500

Utilities Cost 219,215 263,058 306,901 350,744 394,588

Wages & salaries 16,238,037 17,286,145 18,756,928 20,269,330 19,271,852

Employee Benefits 3,247,607 3,247,607 3,247,607 3,247,607 3,247,607

Travelling & Perdiem 1,623,804 1,623,804 1,623,804 1,623,804 1,623,804

Legal & Audit fee 100,000 100,000 100,000 100,000 100,000

Office Supplies 354,941 425,929 496,918 567,906 638,894

Uniform & Clothing 394,000 394,000 394,000 394,000 394,000

Postal,Telephone,Telex etc 141,976 170,372 198,767 227,162 255,558

Miscellaneous Expense 600,000 600,000 600,000 600,000 600,000

Medical & Related Expenses 1,623,804 1,623,804 1,623,804 1,623,804 1,623,804

Marketing & Promotional Cost 709,882 851,859 993,835 1,135,811 1,277,788

Service Bus Rental Cost 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000

Building Rental Cost 2,925,978 2,925,978 2,925,978 2,925,978 3,657,473

Training Cost 599,250 419,475 880,898 1,387,414 1,942,379

Fuel & lubricant Cost 639,257 767,109 894,960 1,022,811 1,150,663

Repair & Maintenance 2,172,688 2,172,688 2,172,688 2,172,688 2,172,688

Spare parts & consumables 1,715,873 1,715,873 1,715,873 1,715,873 1,715,873

Insurance 765,610 765,610 765,610 765,610 765,610

Product Transportation Cost 528,539 634,246 739,954 845,662 951,369

Total Operating Costs 126,400,520 145,907,626 166,478,605 187,136,297 206,064,052

Depr & Amort Expense 4,982,325 4,982,325 4,982,325 4,982,325 4,982,325

Interest Expense 6,703,215 6,055,747 5,198,782 4,084,321 2,969,860

Total Production Costs 138,086,060 156,945,699 176,659,712 196,202,943 214,016,238

4.3.3. Profitability

The projected profit and loss statement for 10 years shows that the project will realize a net profit

of Birr 3.9 million and Birr 38 million during the first and tenth years respectively. This yields an

average annual net profit of Birr 31.4 million implying that the project will be profitable

throughout the 10 projection years. The proposed incentive package which among other things

includes higher loans, longer tax exemption period and partial coverage of training costs and

salary of expatriates by the government contributes to the high profit levels. If costs directly

covered by the government (cost of recruitment and training and salary of expatriates) are

removed and the enterprise gets the usual tax holiday (seven years), the profit levels during the

first and tenth years will respectively fall to negative of Birr 1.67 million and to Birr 27 million.

32

This shows that while the profitability of the enterprise falls significantly if these incentives are

removed; investing in the industrial park is till profitable.

Table 4.7: Partial Income Statement


1 2 3 4 5

Total Revenue 141,976,433 170,371,719 198,767,006 227,162,292 255,557,579

Total Operating Costs 126,400,520 145,907,626 166,478,605 187,136,297 206,064,052

Profit B. Depr. & Amort. Inter. And

Tax 15,575,913 24,464,093 32,288,400 40,025,995 49,493,526

Deprec. and Amort. 4,982,325 4,982,325 4,982,325 4,982,325 4,982,325

Profit Before Int. and Tax 10,593,588 19,481,768 27,306,075 35,043,670 44,511,201

Interest Expense 6,703,215 6,055,747 5,198,782 4,084,321 2,969,860

Profit Before Tax 3,890,373 13,426,020 22,107,293 30,959,349 41,541,341

Profit tax - - - - -

Net Profit/Loss 3,890,373 13,426,020 22,107,293 30,959,349 41,541,341

Dividend/withdrawal 778,075 2,685,204 6,632,188 9,287,805 12,462,402

Retained Earning 3,112,298 10,740,816 15,475,105 21,671,544 29,078,939

Cumulative Retained Earning 3,112,298 13,853,115 29,328,220 50,999,764 80,078,703

4.3.4. Cash flow/Liquidity

The projected cumulative cash flow shows a balance of Birr 2.7 million in the first year and

increases to Birr 159 million at the end of projection period. This indicates that the project will

not face liquidity problem in financing its operational cost and settling its debt obligation. The

cumulative cash balance refers to the amount of cash that remains after paying for debt

settlement and dividend for shareholders; it can be used for internal growth and unforeseen

incremental/replacement investments.

If the government does not cover part of the training cost and the salary for expatriates and the

enterprise gets the usual seven years tax exemption, the cumulative cash flow level will fall

(there will be a negative balance of Birr 1.75 million in the first year, while the balance in the

tenth year falls to Birr 127 million).

33

Table 4.8: Partial Cash Flow Statement


0 1 2 3 4 5

Cash Inflows

Owner's Equity 13,302,415

DBE Loan 75,380,352

Net Profit

3,890,373 13,426,020 22,107,293 30,959,349 41,541,341

Depreciation & Amort

4,982,325 4,982,325 4,982,325 4,982,325 4,982,325

Total Cash Inflows 88,682,767 8,872,698 18,408,346 27,089,618 35,941,674 46,523,666

Cash out Flows

Fixed assets 44,289,141

Working capital 42,910,440

Increase In working Capital

7,340,642 8,065,823 8,118,360 7,939,321

Pre-Operating Costs 544,997

Pre-Operating Interest 938,189

Loan Repayment

5,386,344 8,079,516 12,382,898 12,382,898 12,382,898

Dividend/withdrawal

778,075 2,685,204 6,632,188 9,287,805 12,462,402

Replacement

4,050,923

Total Cash Outflows 88,682,767 6,164,419 18,105,362 27,080,910 29,789,063 36,835,545

Net Cash Flow - 2,708,279 302,983 8,709 6,152,611 9,688,121

Cumulative Cash Balance

2,708,279 3,011,262 3,019,971 9,172,582 18,860,703

4.3.5. Net Present Value and Financial Internal Rate of Return

The financial internal rate of return (FIRR) for the ten years projection period is found to be

34%. This is high compared to the assumed bank’s interest rate of 9%. The net-present value

(NPV), discounted at a discounting rate of 10% is positive and amounts to Birr 163.24 million

signifying that the anticipated project is robust and financially viable. The NPV and FIRR are

high mainly due to the low initial fixed investment (as the enterprise does not develop its own

building) and the attractive incentives. Without the direct government incentives, the FIRR and

NPV decline to 30% and Birr 139.94 respectively.

4.3.6. Sensitivity Analysis

The assumptions used in the financial analysis are conservative and the actual feasibility of the

project is believed not to deviate much from the projected one. However, the project may face

some unforeseen risks/shocks. The most likely shocks are decrease in sales revenue (which may

happen due to decrease in prices and/or decrease in sales), increase in operating costs (for

34

example, due to increase in global price of raw materials) and increase in investment cost. The

project’s sensitivity to absorb the above adverse shocks is tested by altering each variable at a

time: decrease in sales revenue; increase in operating cost and increase in investment cost each

by 10%.

The NPV declines to Birr 16.88 million, 52.31 million and 154.12 million with 10% changes in

revenue, operating cost and investment cost respectively; the NPV value in all cases remains far

above zero. Similarly, the FIRR decreases to 13% with decrease in sales revenue, to 18% with

increase in operating cost and to 32% with an increase in the investment cost; all of the FIRRs

are above the expected lending rates. The result shows the viability of the project under the

different risk scenarios. However, the project is relatively sensitive to decline in revenue. To

address the relative sensitivity of the project to shocks in revenue, the enterprise should look into

alternative market destinations; for example, considering markets in African could be very

useful.

Table 4.9: Result of Sensitivity Taste

Description

Decrease in Price by

10%

Increase in Operating Cost

by 10%

Increase in Investment Cost

by 10%

Original New Original New Original New

NPV 163,240,120 16,876,011 163,240,120 52,309,342 163,240,120 154,120,313

FIRR 34% 13% 34% 18% 34% 32%

4.4. Socioeconomic Benefits

The project will create job opportunities for 830 skilled and semi-skilled local

laborers.

It will create opportunities for other business activities in the area as a linkage effect.

The training given to the local work force and its engagement in the production

process when the enterprise became operational will create an opportunity for a

technology transfer.

Foreign exchange earnings: as the factory is exported oriented, it will increase the

foreign current reserve of the country.

35

It can serve as a demonstration case to encourage domestic investors to join the

industrial sector.

36

V. CONCLUDING REMARKS

As one of the strategies to encourage investment in the industry sector in general and the

manufacturing sector in particular, the Ethiopian government is developing modern industrial

parks in different parts of the country. While the response from international investors has so far

been very encouraging, the government also recognizes the importance of attracting domestic

investors to the industrial parks; to that end the government is planning to provide an attractive

incentive package for domestic investors who can join the industrial parks and produce a selected

manufacturing products including garment for the export market.

In this document, the feasibility of a model garment producing enterprise is studied. The

enterprise will be established in HIP on a shed of 5,500 m2

with a total investment cost of Birr 89

million. The enterprise will produce two types of products: Polo-shirts and Shirts. It will have a

daily total production capacity of 11,900 Pcs and will export 100% of its production. A ten year

projected profit and loss statement shows that the project is feasible; the enterprise will make an

average annual profit of Birr 31 million. The feasibility of the project is also robust to different

risk factors.

The availability of cheap labour force coupled with the attractive incentive package proposed by

the government contributed for the viability of the project. But it is also worth noting that the

feasibility of the project depends upon some assumptions. The most important assumption is that

the enterprise will not have problem of securing foreign market. While securing foreign market

is possible as far as the product is of high quality and the price is competitive, penetrating the

global market requires skill and experience which domestic investors generally lack. As part of

the larger incentive package, the government is planning to help potential investors in their

search for a foreign market; but it is important that this issue gets due attention. It is also

imperative that a detailed market study is done (probably jointly by the prospective enterprise

and the government) before the enterprises are established in the park.

Another point that needs attention is the fact that most of the major raw materials for the model

enterprise are going to be imported. Under the current condition, there is problem of accessing

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quality raw materials from the domestic market and it is necessary to import them from abroad in

order to produce quality products for export. But this does not only cost the country in terms of

foreign currency but also limits the linkage effect of the enterprise. This may also lead to risk

associated with potential fluctuations in the supply and price of imported raw materials. Thus, for

a sustainable growth of the textile and garment industry and for a maximum linkage effect, it is

very important that the domestic supply of quality raw materials is given due emphasis.

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Appendix: Production lay-out plan

A MODEL GARMENT PRODUCING ENTERPRISE TO BE ESTABLISHED … Feasibility... · 7 Band Knife 2 3,800...

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