Table of Contents

I. EXECUTIVE SUMMARY.................................................................................................................1
II. BACKGROUND INFORMATION...................................................................................................4
2.1 The Applicant.................................................................................................................................4
2.2 The Project.....................................................................................................................................4
2.3 Certificates and License.................................................................................................................4
2.4 Brief History of the Promoter/Project............................................................................................5
2.5 Capital Structure of the Project......................................................................................................5
2.6 Business Track Record..................................................................................................................5
2.7 Credit Information of the Promoter/Project...................................................................................6
III. KEY SUCCESS, RISK FACTORS AND SWOT ANALYSIS........................................................7
3.1 Key Success Factor........................................................................................................................7
3.2 Risk Factors and Proposed Mitigating Measures..........................................................................8
3.3 SWOT Analysis.............................................................................................................................9
IV. MARKET STUDY.............................................................................................................................10
4.1 General Overview........................................................................................................................10
4.2 Market Segmentation...................................................................................................................10
4.3 Domestic Market..........................................................................................................................10
V. TECHNICAL STUDY.......................................................................................................................19
5.1 Project Location...........................................................................................................................19
5.2 Plant Layout and Civil Works......................................................................................................19
5.3 Machinery and Equipment...........................................................................................................21
5.4 Auxiliary Equipment....................................................................................................................21
5.5 Vehicles........................................................................................................................................22
5.6 Office Furniture & Office Equipment..........................................................................................22
5.7 Utility...........................................................................................................................................22
5.8 Capacity Utilization and Product Mix.........................................................................................23
5.9 Production Process and Technology Selection............................................................................23
5.10 Raw Material and Source.............................................................................................................25
5.11 Environmental Impact Assessment..............................................................................................26
5.12 Implementation Schedule.............................................................................................................27
VI. ORGANIZATION, MANAGEMENT AND MANPOWER..........................................................28
6.1 Organization.................................................................................................................................28
6.2 Project Management....................................................................................................................29
6.3 Man Power Requirement.............................................................................................................30
6.4 Manpower Training.....................................................................................................................30
VII. FINANCIAL ANALYSIS..................................................................................................................31
7.1 Fund Allocation...........................................................................................................................31
7.2 Source of Fund.............................................................................................................................32
7.3 Expected Financial Results..........................................................................................................33
VIII.SOCIO ECONOMIC BENEFIT......................................................................................................35
IX. CONCLUSION AND RECOMMENDATION...............................................................................36
9.1 Conclusion...................................................................................................................................36
9.2 Recommendation.........................................................................................................................36
9.3 Terms and Conditions..................................................................................................................37
X. ANNEXES..........................................................................................................................................40

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I. EXECUTIVE SUMMARY

Dawit K/Mariam foam and spring mattress has been established in Tigray Regional State,
Mekelle town Quiha Woreda which is about 783km far away from Addis Ababa on 2008E.C
with the objective of producing foam & spring mattress to the local market with registered
capital of Birr 125 million. The project has secured a total area of land 20,000 m 2 with the cost of
Birr 0.75 per m2 per year for 70 years of lease period in 1998E.C. The promoter has existing
building like guard house, septic tank, toilet, shower, fence & main gate and its valuation is made
by CRMD-I technical team which worth a total of Birr 2,023,451 and the main building &
construction is under progress and till now the promoter has also executed Birr 7,661,542.
Therefore, Birr 26,055,271 is planned for the remaining civil & construction work.

Regarding the credit information obtained from NBE dated 29/08/2016 with enquiry ID 420341,
the promoter as well as his spouse has no credit relation with any local banks including DBE. In
addition to this, the determinant factors discussed in the firm level success factor shows that, the
promoter and project is bankable in all factors that in line with the DBE’s parameter.

The other most important factor for the success of the project is that of marketability of the
product. Accordingly, as discussed in the market study which depends on Bank’s commodity
study on foam and foam products manufacturing prepared on Sep 2015, there is demand for
foam mattress which mainly emanates from household consumption, educational sector, hotels
and hospitals and the demand-supply gap is also has an increasing trend.

Mean while, even though the project’s product has marketability, its environmental impact
should be evaluated and accordingly, as per the submitted environmental impact assessment
report, the total dust emission, soil & water pollution, air pollution & others that emanate from
the factory will not have significant incremental or cumulative impact on the environment as far
as the mitigation mechanisms are implemented by the promoter and that’s why the study is
approved by Tigray National Regional State. Apart from this, the project has also different
positive socio-economic benefits such as employment creation, foreign currency saving, income
generation in the form of tax, transfer of knowledge and contribution for GDP Growth is the last
but not the least. Besides, based on the EIA made by the promoter and approved by concerned
government organ, the project will not have significant environmental impact.

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Regarding the competence of the management, the general manager and the owner of the project,
Ato Dawit K/Mariam Gesesse has academic background of grade 12 th. As per the due diligence
report, he has more than 15 years of experience in his family house and office furniture business
in different positions. In addition to this, the intended Factory Manager, Ato W/Giorgis
G/Medhin, as it is observed from due diligence assessment report, has BA degree in Economics
from Mekelle University. He has also Diploma in Computer Science and in Banking and Finance
from SOS Computer Training Center & Mekelle University respectively. As his Curriculum
vitae shows, he has about 24 years of work experience.

Technical viability of the project has also been assessed and the technical team of the Bank has
evaluated and recommended all the necessary investment items like building & constructions,
machinery & equipment, vehicles, generator, auxiliary equipments and the like that are
technically viable and their costs are included in the total investment cost of the project. Based
on the virtual appraisal team determination, the total investment cost is Birr 71,093,134

Therefore, the assigned appraisal team has tried to go through each financial component and the
project is viable in all aspects & capable to achieve its objective. The financial internal rate of
return also checked and it is viable even in adverse conditions that can possibly affect either
project cost or revenue. Before and after tax IRR of the project is calculated to be 50% and 44%,
respectively. The project’s sensitivity to adverse situations has also been tested by reducing
revenue and increasing operating cost and investment cost all by 10%. In all scenarios, IRR is
above the cost of capital confirming that the project is financially viable. The net profit of the
project is also forecasted to be Birr 15,421,965 and Birr 27,559,050 for the first and the last 10 th
projected year, respectively. The projected cumulative cash flow at the end of the first and last
project year is computed to be Birr 18,222,951 and Birr 205,588,286 respectively indicating that
the project is liquid throughout the envisaged project years.

After thorough analysis of the project and considering its socio-economic benefits, the assigned
appraisal team, therefore, recommended and approved at its level the total loan amount of
Birr 53,319,850 for the establishment of Ato Dawit K/Mariam Foam Factory project to be repaid
within six years with the terms and conditions stated under chapter 9 sub title 9.3 of this
appraisal report. The summary of financial analysis of the project is depicted below:-

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I. Project Investment

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 Description Amount Percentage
Total Fixed Investment Costs 57,094,544 80%
Pre-production Capital Expenditure 4,347,062 6%
Working Capital 9,651,527 14%
Total 71,093,134 100%
-
II. Source of fund

Description Amount D/E Ratio

Debt-DBE Loan 53,319,850 75%
Equity 17,773,283 25%
Total Investment Cost 71,093,134 100%
-
III. Expected Financial results

Description Year 1 Year-10

Sales Revenue 59,734,796 104,535,892
Net Profit/Loss 15,421,965 27,559,050
Cumulative Cash Balance 18,222,951 205,588,286
FIRR before Tax = 50%
FIRR after Tax = 44%

IV. Sensitivity Analysis

Alternative Scenarios IRR Before Tax IRR After Tax

Revenue decreased by 10% 39% 34%
Operating costs increased by 10% 44% 39%
Investment costs increased by 10% 46% 40%

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II. BACKGROUND INFORMATION
II.1 The Applicant
 Name of the applicant: Dawit K/Mariam Gesesse
 Address:-
 Region: Tigray National Regional State
 City: Mekelle
 Woreda: Debub
 Kebele:15
 House No: 396
 Mobile: 09-14-30-01-17
 E-mail: [email protected]

II.2 The Project

 Name: Dawit K/Mariam Foam & Spring Mattress Manufacturing Factory
 Address:
 Region: Tigray Regional State
 City: Mekelle
 Woreda: Quiha
 Kebele: 02
 Telephone: 09-14-30-01-17

II.3 Certificates and License

 Form of Organization: Sole Proprietorship
 Investment Certificate
 Licensing Organ: N.State of Tigray Trade, Industry and Urban Dev’t Bureau
 Licensing Date: 23/03/2008 E.C
 Licensing No. ኢን-መቐ/2091/08
 Principal/Commercial Registration Certificate
 Licensing Organ: Tigray Regional State Trade & Industry Dev’t Office
 Licensing Date: 16/10/2008 E.C
 License No: መቐ/ኹ/01/3/39/39112/2347/2008
 TIN No: 0003174167
 Right of Occupancy:-Leased Land
 Lease Period: 70 years
 Size of Land Holding:-20,000 m2

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  Lease Amount:- 0.75 Birr/m2/yr
 Status of the Project: New
 Type of Project: Manufacturing
 Project Objective: Production of foam mattress and pillow to local market

II.4 Brief History of the Promoter/Project

Dawit K/Mariam foam and spring mattress has been established on 2008E.C in Tigray
Regional State, Mekelle town Quiha Worda which is about 783km far away from Addis Ababa
with the objective of producing foam & spring mattress to the local market. As per the
investment permit, the registered capital of the project amounts to Birr 125 million. The
proposed project would be established in Mekelle town Quiha Worda with a total area of land
20,000 m2 which leased for 70 years from the regional state with the cost of Birr 0.75 per m 2
per year.

According to the due diligence assessment report, Ato Dawit K/Mariam Gesesse is the Owner
& General Manager of the project. His educational background is grade 12 complete. However,
he has more than 15 years of experience in his family business on the sector of office & house
furniture.

As per the submitted documents, the project will have the necessary utility: electricity and
water which are the major determinant factor for the project success. Accordingly, to realize its
objective, the promoter has approached Development Bank of Ethiopia for partial financial
support as a new loan of Birr 54.89 million to cover partial investment cost of the project.

II.5 Capital Structure of the Project

Dawit K/Mariam foam and spring mattress Manufacturing factory is established as a sole
proprietorship form of the business based on Ethiopian Commercial code as we confirm from
the investment permit, it is established with registered capital of Birr 125 million.

II.6 Business Track Record of the Applicant

As per the due diligence assessment report of CRDM I, the Owner and General Manager of the
project, Ato Dawit K/Mariam, has more than 15 years of experience in different positions on the
family business that engaged in Office & house furniture business.

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 II.7 Credit Information of the Promoter/Project

II.7.1 Credit Relation with DBE & Local Banks

As per the information obtained from NBE dated 29/08/2016 with enquiry ID 420341, the
promoter as well as his spouse has no credit relation with any local banks including DBE.

2.8 The Loan

Table 2.2 Loan Requested Vs Proposed

Requested Proposed
Sr. Variation
Description Amount Amount Reason for Variation
No. (Birr)
(Birr) (Birr)
Based on the Bank's Civil Engineer, the
revised planned building & construction cost is
Building and
1 25,501,381 22,735,420 (2,765,961) Birr 26,055,271. Among this, Birr 3,319,851
Construction
(~12.74%) is planned to be financed by the
promoter's equity contribution.
The planned machineries & equipments are
based on the submitted pro forma invoices and
Machineries and
2 14,570,810 13,743,438 (827,372) recommendation of the Bank's Mechanical
Equipments
Engineer, and the total cost shall be financed
by the loan.
Auxiliary The item was not included in the loan
3 - 2,247,531 2,247,531
Equipments requested by the promoter.
The proposed value is based on the submitted
pro forma invoices and recommendation of the
4 Vehicle 4,320,000 3,802,142 (517,858)
Bank's Mechanical Engineer, and the total cost
shall be financed by the loan.
The item was not included in the loan
requested by the promoter. However, the
virtual appraisal team included into the
5 Generator - 680,000 680,000
investment items of the project considering its
significance for smooth operation of the
project.
The proposed office furniture and equipments
Office Furniture
6 206,500 459,792 253,292 are based on the organizational structure and
and Equipments
proposed human resources.

The proposed working capital is determined

based on the parameters set by commodity
7 Working Capital 10,289,885 9,651,527 (638,358)
study. Updated price of raw materials is also
employed for operating cost determination.

Total 54,888,576 53,319,850 (1,568,726)

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III. KEY SUCCESS, RISK FACTORS AND SWOT ANALYSIS
III.1 Key Success Factor

III.1.1 Macroeconomic Success Factors

 A continuously increasing GDP Growth which highlights a positive trend of
economic growth.
 Progressive improvement in infrastructure mainly in transport that enable the
input & output to avail for the market in a preferable quality and quantity.
 The strong support and incentives from the government
 Peace and stability of the country
 Provision of skilled, well educated and specialized manpower from Universities,
Technical and Vocational Colleges and institutes.
 Existence of trained and cheap manpower and daily laborers in the country.

III.1.2 Sector Success Factors

 The Demand of the Product: the demand for foam is primarily emanated from the
furniture, bedding and others sub sectors.
 The Strong Support & Incentives from the Government: Government incentives
like tax holiday, lower rate of custom duty and low land lease cost are the
encouraging incentives of the sector.
 Availability of Abundant and Cheap Labor: Nowadays, many skilled students are
graduated from TVET and various public and private colleges and universities
who are able to participating in any developmental activities.

III.1.3 Firm Level Success Factors

 Character:-The tax clearance letter dated 28/10/2008 E.C issued from the
government of regional state of Tigray Mekelle office of revenue development of
local administration of Quiha reveals that, the promoter has been paying all his
tax duties on time. The risk measurement matrix of the due diligence report also
shows that, the character of the applicant is scored 225 points out of 300 rating
scale. All these clearly reveal that the promoter has good character. Although Ato
Dawit K/Mariam is 12th grade completed, he appointed as the general manager of

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 the project since he has an ample experience in the different areas of family
business for more than 15 years. In addition to this, the assigned project manager
also has different experience for about 24 years. Furthermore, the promoter
planned to hire professional employees at each department those who can support
him for the successfulness of the project goals.
 Capacity: The project has average net cash flow of Birr 20.56 million
throughout the project life, and this indicates that it can meet its financial
obligations from the project itself.
 Capital: According to the investment permit, the registered capital of the project
is Birr 125 million and the capital is enough to cover the expected equity
contribution.
 Collateral: The project falls in the category of manufacturing sector which the
bank considers as one of the priority area; hence the bank will take as collateral
the project itself.
 Compliance: All the necessary permits and licenses required for the project have
been submitted. The kind of the business itself also in line with the government’s
rules and regulations. In particular, the project is one of the priority area projects
of the Bank. Thus, it is possible to say that the project complies with all regional
and local laws and regulations as well as the bank’s policies and procedures.

III.2 Risk Factors and Proposed Mitigating Measures

III.2.1 Risk Factors

 Competition: The project will face stiff competition both from local producers and
importers in terms of price and quality.
 Price Escalation: This is happened due to the major raw materials required for the
project’s product is imported from abroad, which depends on the international market
price fluctuations.
 Power Interruption: - Most of the time there is power interruption in the county
which can be obstacle to proper operation of the industry.
 Shortage of Foreign Currency: - is a major constraint for foam factories since
almost all inputs used for the production is imported from abroad.

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 III.2.2 Risk Mitigating Measures

 The project should focus on quality & affordable product price to compete
existing & potential firms as well as imported products.

 Since the project import raw materials and chemicals from abroad, the marketing
strategy must be sound to procure these inputs on fair price.

 In case of power interruption, the assigned appraisal team considers diesel

generator with a capacity of 88KVA/70.4KW. Hence, the project can use the
generator during power interruption for basic machinery and fro products at the
process level to pretend from pose.

III.3 SWOT Analysis

Strengths Weaknesses
 The general manager of the project has  The promoter has no relevant educational back
ample business experience. ground to plan, organize and monitor the
 Experienced project manager overall operation of the project.
 Suitability of the project’s location.

Opportunities Threats
 Comparative advantages due to ample  Cost escalation of imported raw materials due
work force with cheap labor cost to world economy and fluctuation of foreign
 Growing and sufficient demand for the currency.
commodity  Competition from existing and potential firms
 Improvement of infrastructure  Shortage of foreign currency
 Various investment incentive extended by  Quality sensitive product
government like tax holiday, duty free
privilege and low lease cost

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IV. MARKET STUDY

IV.1 General Overview

The data for market study is taken from Commodity Studies on Foam and Foam Products

Manufacturing (1st Up date) which is prepared by the Research Process of the Bank on
September 2015. Since the applicant has planned to sell his product to the local market, this part
of market study focuses on the domestic market. Accordingly, it focuses on analysis of the
domestic market which is the demand and supply situation.

It is also stated in the commodity study that, the production process makes the re-exporting
process to be difficult due to cost build up; hence, the destination of the products specified under
this commodity will be domestic market as there is virgin or untouched demand in the country.

IV.2 Market Segmentation

The market can be segmented based on the consumer. By destination, foam can be segmented
into only domestic market. This is because polyurethane foam trade is not economic over larger
distances. By product, foam can be segmented into foam mattress, bonded foam, under layers
and others like Padding, Packet sponge, Shoulder pads, Shredded foam, Sofa seats, Car Seats,
Foam scraps & Foam sofas. However, the commodity study considers only the consumption of
foam for mattress and furniture purposes.

IV.3 Domestic Market

IV.3.1 Demand for Foam

In Ethiopia polyurethane foam is used to produce the following products:-
i. Mattress : First and Second grade quality mattress
ii. Bonded Foam: It is firm foam. It is for pillows, cushions and others
iii. Under Layers: This is the bottom and dense part of the foam.
iv. Others: Padding, Packet sponge, Shoulder pads, Shredded foam, Sofa seats, Car Seats,
Foam scraps and Foam sofas.

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i. Mattress
Both the first and second grade quality mattresses are the first choice for foam factories in
Ethiopia due to a huge demand in domestic market. The first grade foam is high density foam
which can substitute spring foam as its thickness increases. This all depends on the customer and
their specific needs.

ii. Bonded Foam

Bonded Foam has better resilience and higher density than the normal flexible polyurethane
foam. In most Middle-East Countries, bonded foam is the only product that has been found to be
most suitable for floor seating arrangement. It is also customary in certain Countries of the
World to sit on the floor and the bonded foam has received a very special customer attention.
Since this product is in such good demand, it has been found affordable to granulate even good
foam into granules to produce Bonded Foam.

iii. Under Layers

This is the bottom and dense part of the foam and has a plastic nature. Under layers are highly
used by Tapestry for different purpose.

iv. Other Uses of Foam Sheets

This can be prepared from first and second grade foam. Foam sheets are typical used for dining
room chairs, bed sheet slipcovers, mats, pet mattresses and much more.

As discuss earlier the demand for foam mainly emanates from mattress, furniture industries,
packing in industrial machines, etc. However, in Ethiopian case 80% of demand for foam comes
from mattress and due to unavailability of data to assess the demand for foam by all products,
this study only considered the demand of foam for mattress and furniture factories.

IV.3.1.1 Demand of Foam for Mattress

The demand for foam mattress mainly emanates from household consumption, educational
sector, hotels and hospitals. The domestic consumption of foam for mattress is determined using
Apparent Consumption Approach.

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As shown in the table below, there is a continuous incremental in the per capita consumption of
foam for mattress from 0.00116m3 in 2005/06 to 0.00363m3 in 2013/14 with an average per
capita consumption of 0.00232. However, there is a decreasing trend in the per capita
consumption of foam for mattress from 0.00257 m 3 in 2008/09 to 0.00050 m3 in 2009/10 due to
significant decreasing trend of foam production. Overall, the average annual per capital
consumption of foam for mattress for the past nine years is 3.71% and its average annual PCC
growth rate is 3.71%. However, for projection purpose the research process used an average
annual PCC starting from the year 2005/06 to 2013/14 i.e. 0.00232 m3.

Table 4.1: Per Capita Consumption of foam Mattress

Production Population PCC PCC Growth
Year
(M3) (No) (M3/person) Rate (%)
2013/14 313,958 86,579,396 0.00363 0.11
2012/13 276,324 84,327,842 0.00328 0.12
2011/12 238,690 81,763,847 0.00292 0.09
2010/11 213,958 79,815,345 0.00268 4.39
2009/10 38,741 77,918,449 0.0005 -0.81
2008/09 195,166 75,892,129 0.00257 0.13
2007/08 168,558 73,918,505 0.00228 0.23
2006/07 133,184 71,996,206 0.00185 0.59
2005/06 81,510 70,123,898 0.00116 -
3
Average PCC (M /person) 0.00232
Average PCC Growth Rate (%) 3.71
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date)

4.3.1.2. Demand for Foam by Furniture Factories

In Ethiopia foam is more consumed by furniture factories next to mattress. According to

commodity study as sited Ethiopian Investment Agency, there are 414 registered home furniture
factories from which 329 are on pre-implementation stage, 33 are on implementation stage while
the remaining 52 are on operational stage. Out of the operational factory, only five of them are
found in Addis Ababa and the research process attempt to approach all five registered and others
unregistered furniture factories in Addis Ababa.

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Accordingly, the survey indicates that, the furniture factories are categorized in to two types:
furniture factories that are used foam and furniture factories that is not used foam rather they
imported furniture from abroad and assembled here. Those furniture factories that are found in
Addis Ababa and imported furniture and assembled here in large scale are: Dream, Delux, Fine
Glory, Waryt, Warka, Emrald and GM furniture.

Whereas 2RN Solomon with an average production of 12 m 3 per annum, Wanza Furniture with
an average production of 350 m3 per annum, Alfa Furniture with an average production of 1,400
m3 to 2,000 m3 per annum and 3F 2,112 m3 to 2,534 m3 per annum. On average they produce,
1,096.25 m3 of foam per annum. Based on the survey made by research process, out of the total
52 operational furniture factories, 50% of them are used foam for their products. Accordingly,
the annual consumption of foam by 26 furniture factories is assumed to be 28,502.5 m3.

IV.3.2 Demand Projection

The research process assumed that, annual population growth rate of 2.67%, average per capital
consumption of 0.00232 m3/person is used to determine household consumption of foam for
mattress and GDP growth rate of 10.3% is used to forecast the demand of foam for furniture
factories.

Table 4.2: Demand Projection of Foam

Domestic Consumption Furniture Total

Year Population Consumption Factories Demand
(No) (M3) (M3) (M3)

2016/17 93,701,218 196,773 39,500 236,273

2017/18 96,203,040 202,026 42,858 244,884
2018/19 98,771,661 207,420 46,501 253,922
2019/20 101,408,863 212,958 50,455 263,413
2020/21 104,116,480 218,644 54,744 273,388
2021/22 106,896,389 224,482 59,398 283,880
2022/23 109,750,522 230,476 64,447 294,923
2023/24 112,680,860 236,629 69,926 306,556
2024/25 115,689,439 242,947 75,871 318,818
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date) & own projection

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IV.3.3 Supply of Foam
IV.3.3.1 Domestic Production

A. Existing Production
According to the research process, there are 30 manufacturers of foam in the country. However,
the large scale foam factories in Ethiopia are Rain Bow Foam and Plastic Factory PLC, Addis
Ababa Foam and Plastic Factory PLC and Kangaroo Plastic PLC, and the other foam factories
are small scale and their brand is not well known in the market. List of the factories are depicted
below:

Table 4.3: List of Existing Factories

Sr. Sr.
Name of the Company Name of the Company
no no
1 Rainbow Industries 16 MedineTemir PLC
2 Amaga PLC 17 Solomon Hagos G/Hiwot
3 Kangaroo Plast 18 Tesfaye Dejene
4 Miriyammamo 19 TesfayeWube
5 Felek Trading PLC 20 Zemos General Trading PLC
6 Addis Ababa Foam and Plastic Factory 21 Jong Zing
7 Adey Abeba Foam and Plastic Manufacturing PLC 22 King Core Spring
8 Addise Demem 23 Luorubino
9 Bahiru Abrham 24 Clean All Industries
10 BahreHailu 25 Royal
11 China Panda PLC 26 Abayiminich
12 Eyob Nigussie 27 Aanbesa
13 Faddis Ababa bade General Trading PLC 28 Amanuel Zemenfes K/mariam
14 Fanaye Alemu Abebe 29 Misal Industry Business PLC
15 Kebrom Fome and Plastic Manufacturing and 30 Derasa Pp Mates Factory
Distributing PLC
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date)

According to the research process, the data obtained from large scale manufacturing report of
Central Statistic Authority, there is a continuous incremental in the production of foam from
101,888 m3 in 2005/06 to 439,491 m3 in 2013/14. However, there is a decreasing trend in the
production of foam from 243,958 m3 in 2008/09 to 48,426m3 in 2009/10 due to shortage of
foreign currency to purchase inputs. Overall, the average annual growth rate of production of
foam for the past six years is 0.46%.

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According to the data, shortage of foreign currency is a major constraint for foam factories since
almost all inputs used for the production is imported from abroad. Due to this fact existing large
foam factories like Addis Ababa Foam factory have only remaining one month input in the store
and might stop production due to shortage of foreign currency. However, if this problem is
solved the production of foam will increase dramatically. Thus the research process used annual
GDP growth rate of 10.3 % instead of annual growth rate of 73%.

Table 4.4: Production of Foam

Production (Cubic Annual Growth
Year
Meter (M3) Rate (%)
2013/14 439,491 0.12
2012/13 392,449 0.14
2011/12 345,406 0.16
2010/11 298,363 5.16
2009/10 48,426 -0.8
2008/09 243,958 0.16
2007/08 210,698 0.27
2006/07 166,480 0.63
2005/06 101,888 -
Average Growth Rate 0.73
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date)

IV.3.3.2 Supply Projection

The research process assumed that, import of foam is ignored with new entrants are considered
and GDP growth rate of 10.3% is considered for production projection.

Table 4.5: Supply Projection for Foam

Domestic Production (M3) Total Supply
Year
Existing New (M3)
2016/17 72,816 20,155 92,971
2017/18 79,005 20,155 99,160
2018/19 85,720 20,155 105,875
2019/20 93,006 20,155 113,161
2020/21 100,911 20,155 121,066
2021/22 109,488 20,155 129,643
2022/23 118,794 20,155 138,949
2023/24 128,891 20,155 149,046
2024/25 139,846 20,155 160,001
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date) and own projection

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IV.3.4 Demand Supply Gap
As shown in the table 4.6 below, even by not considering the demand of foam for different
products like packing, construction etc, there is a huge demand supply gap for foam.

Table 4.6: Demand Supply Gap

Total Demand Total Supply DD-SS Gap
Year
(M3) (M3) (M3)
2016/17 236,273 92,971 143,302
2017/18 244,884 99,160 145,724
2018/19 253,922 105,875 148,047
2019/20 263,413 113,161 150,252
2020/21 273,388 121,066 152,322
2021/22 283,880 129,643 154,237
2022/23 294,923 138,949 155,974
2023/24 306,556 149,046 157,510
2024/25 318,818 160,001 158,818
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date) and own projection

IV.3.5 Marketing and Marketing Arrangement

Concerning the marketing arrangement for foam mattress the seller sell its product directly to
consumers and indirectly through distributers and whole sellers. The marketing arrangement with
the wholesalers is on the bases of only direct sell or cash. Point of ownership is transferred at
seller factory gate.

IV.3.6 Marketing Channel

It is assumed that after production foam products would passes through a channel before they
reach end users. The marketing chain of foam products is shown on the following chart depicting
supply chain in domestic market (see Figure 1).

Figure 1: Marketing Channel of Sanitary pad and diapers

Producer

Wholesale

Retailer

Consumer

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IV.3.7 Price and Price Trend of the Commodity

Table 4.7: Factory Gate Price of foam and foam products per cubic meter
Price (Birr/Cubic Meter (M3))
Other foam Sheet Profiled
Year Under
Foam (used for sofa, foam (Ccm Bonded
Layer
chair, car seat etc) pattern)
2014/15 2,422 2,880 2,284 3,836 7,726
2013/14 2,421 2,860 2,045 3,457 7,563
2012/13 2,284 2,740 1,859 3,457 6,875
2011/12 2,272 2,341 1,690 3,457 6,250
2010/11 2,084 2,128 1,410 3,457 5,520
AGR (%) 3.9 8 13 3 9
Source: Commodity Studies on Foam and Foam Products Manufacturing (1st Up date)

IV.3.8 Marketing strategy of the project

Marketing strategy is one of the main tools for securing reliable market and sustainable
customers. An appropriate marketing strategy is good as it enables the promoter to easily enter
into the market. The most important strategy of marketing any product is based on it is means of
advertising. Advertising strategy should be based on making the right information available to
the right target customers.

Accordingly, as stated in the feasibility study, the investor is intended to satisfy all major towns
of the country and focusing on Tigray Region’s users of flexible foam for bedding, furniture
which have the ability and willingness to pay more for high quality foam products such as
middle and high income individuals, Regional State Bureaus, Universities, National Defense and
Federal Police Bureaus.

It is also discussed that, the technology that will be installed will lead the factory to produce with
a minimum scrap which can reduce operating cost. Having this principle the promoter has
designed to set the selling price of its product to be less by 2% than the average selling price of
the main competitors. However, the promoter will use offensive strategy to introduce its product
for the target consumers and gradually increase its market share by providing quality products
and the advertising mechanism includes Mass Media like Television & FM Radio, Bazar &
Exhibitions.

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The investor also planned to use consignment and credit sales to wholesalers, discount sales to
customers who buy more products in cash and will give payment free transport service for big
wholesalers depending on the condition of sales agreement.

In addition to the above marketing strategy, its promotion strategy shall be pull strategy; i.e. in a
pull strategy, the factory encourages end users and business customers to ask intermediaries for
the product building demand to pull the product through the channel. Since most customers are
price sensitive, the price of the product in the market is also considered as an important factor
influencing consumer demand. Hence, to introduce the products and maximize market share, the
promoter shall follow offensive strategy by lowering its price relative to the rivals by using mass
production and setting floor price. The other marketing strategy that will be used by the project is
implementing fast and efficient supply of the quality product to the market. If the customers
obtain quality product at a required quantity and whenever they want, they will be satisfied and
their retention will be increased. This in turn will increase sales and profitability of the project.
Furthermore, the promoter will respond to changes that will occur in the future.

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V. TECHNICAL STUDY

V.1 Project Location

The project is located in Northern part of Ethiopia, Tigray Region. It has already acquired 20,000
m2 of land for a period of 70 years for the purpose of foam and spring manufacturing based on
lease agreement made with Mekelle City Administration Mekelle Municipality on 5/1/1998E.C
on the title dead certificate number of ኩ/ማ/66/31988. The total lease payment is Birr
1,050,000 to be paid within 50 years with annual payment of Birr 19,950. The investor has
already made down payment of 5% which is Birr 52,500. As per the Regional National State of
Tigray Bureau of plan & Finance Tax & Duty Stamp Receipt Number 729501, the investor was
also paid annual lease payment of Birr 117,532.17 for the period 2002-2007E.C which is not
considered as down payment.

The project is particularly located in Mekelle city, Worda Quiha, Kebele 02 industrial zone and it
is near Alula Abanega Air Port which will help the factory to transport its input and output easily
and it is also located on the main road that takes from Quiha to Mekelle City. The distance from
the junction of the main road to the project site is approximately 200m while it is around 12km to
the nearest target market, Mekelle. The site is also accessible with all the necessary utilities and
infrastructures such as electricity, main road, water, telephone, etc that are crucial for smooth
operation of the project and marketing of its final product.

V.2 Plant Layout and Civil Works

V.2.1 Existing Building & Construction

As per valuation made by CRDM-I technical team on May 31, 2016, the promoter has already
built some works and the estimate cost is Birr 2,023, 451. The detail is attached in following
table as follows:

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 Table 5.1: Existing Building and Civil Works
Sr. Built-up Number Unit Block Total Cost
Description
No. Area (M2) of Blocks Cost (Birr) (Birr)
1 Shower and Toilet 43.20 1 207,671 207,671
2 Guard House 17.50 1 84,126 84,126
3 Septic Tank 1 118,370 118,370
4 Fence and Main Gate 1,419,260 1,419,260
5 Consultancy Fee 59,456 59,456
6 Estimated Land Transfer Right 20,032 20,032
Sub-total 1,908,916 1,908,916
Plus: - Location Value (6%) 114,535
Total 2,023,451

V.2.2 Building on Progress & Planned Cost

As per progress report made by CRDM-I technical team dated on June 27, 2016, out of the total
building and construction cost of Birr 33,716,813, the executed cost of building and construction
amounts to be Birr 7,661,542 and Birr 26,055,271 will be assigned for cost of finishing purpose.
The detail is attached in following table as follows:

Table 5.2: Building on Progress and Planned Building and Civil Works

Sr. Built-up Number Unit Block Executed Planned

Description
No. Area (M2) of Blocks Cost (Birr) Value (Birr) Cost (Birr)
1 Factory Hall 3,289.00 1 5,982,520 5,049,082 5,982,520
3 Store with Basement 3,424.33 1 11,604,452 741,656 11,604,452
2 Administration Office 218.70 1 1,179,242 196,009 1,179,242
4 Cafeteria 472.50 1 2,654,255 - 2,654,255
5 Septic Tank 1 105,338 - 105,338
6 Compound Work 6,204,258 - 6,204,258
Sub-total 5,986,747 27,730,066
Plus/Minus: - Material Onsite - 1,674,795 1,674,795
Total 7,661,542 26,055,271
Remark:
1. Cost revision was done as per the submitted design. The cost difference seen is mainly due to the unit price of
the bank. In addition, we have excluded items already executed by the promoters based on the progress report.
The undercut depth of compound work which is 2.2m proposed by the client is not logical depth of undercut.
Hence, the revision was made based on ERA design manuals with its respective vehicle load and recommended
depth of undercut corresponding to soil type
2. The revision was made after a progress report of the project made by the credit process handed to appraisal.
Hence, all executed items for factory, store and office blocks have been excluded based on the progress report.
Besides, progress report shows that fence & septic tank construction were completed & excluded from revision.

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V.3 Machinery and Equipment

The required machinery & equipment that has planned for the project consists of the following
machinery; automatic continuous foaming machine Maxfoam YY-01, Automatic circular cutting
machine with vacuum system, vertical cutting machine (one way cutting), tape edge machine,
mattress cover filling machine, automatic pillow filling machine, foam crushing machine and
high speed sewing machine. Therefore, the appraisal technical team has valued the main
machinery & equipment based on the Pro forma invoices submitted & the total amount is
estimated 13,743,438. The detail is attached in the annex part of this appraisal report.

V.4 Auxiliary Equipment

To facilitate and speed up the work of the project effectively and successfully, auxiliary
materials such as surface/flash mounted addressable manual call point, non frangible, resettable
element and a special key for testing with an integral red LED to indicate activation, Loop
powered sounder/beacon base, HFP outdoor wall sounder beacon, Analog addressable type beam
detector, fire detection, alarm system, fire alarm system installation points fed through fire alarm
system cable of two core with an over sheath and earth conductor, horizontal steam boiler are
incorporated with the main planned machinery. Laboratory equipments like high precision
weighing scale, Viscometer (Laboratory equipment for chemical), foam rebound coefficient
tester, foam sagging/hardness tester, and foam tensile strength tester are also integrated with the
main machinery. Accordingly, based on the Pro forma invoice submitted, the assigned appraisal
technical team has valued the auxiliary equipment and estimated to Birr 2,247,531. The detail is
attached in the annex part of this appraisal report.

Since the natures of the product are susceptible for fire, the investor should implement the
planned fire fighting system properly and should monitor continuously their functionality during
its entire life.

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V.5 Vehicles

Vehicle availability is important so as to facilitate the day to day operation of the business. The
vehicles will be used for carrying out operational activity, administrative task, employee
transportation and for transportation of inputs or raw materials from market and outputs or end
products to the market. To this end, based on the pro forma invoice, the appraisal technical team
has estimated the total cost of vehicles to be Birr 3,802,142. The detail is attached in the annex
part of this appraisal report.

V.6 Office Furniture & Office Equipment

To facilitate and accelerate the office operation, to uphold the motivation of the employee, there
should be a suitable environment for workers and the offices have to be furnished and equipped
with all necessary materials. Hence, the assigned appraisal technical team has estimated to be
Birr 459,792. It is possible to see the detail of office furniture and office equipment attached in
the annex part of this appraisal report.

V.7 Utility
5.7.1. Electric Power Demand
According to the letter from Ethiopian Electric Utility Quiha District Service Provider Center
dated 8/04/2008E.C, it is confirmed to provide electric power supply of 120 KW of power with
an estimated cost of Birr 368,378. In addition to this, to ensure continuous power supply, the
promoter is submitted pro forma invoice and accordingly the assigned technical team is planned
one generator having standby power capacity of 88KVA/70.4KW at a cost of Birr 680,000. For
detail, please visit the annex part of this report.

5.7.2. Water Requirement

It is obvious that, water is so important for potable and used also for manufacturing processes
and sanitation activities. According to the letter submitted from Mekelle Water Supply Service
Office Quiha Branch with reference number of 1967/ጨ/ኩ/ማ/ግ/ቀ 2 dated on 27/10/2008E.C,
the project has already water line of one inch with discharge of 1.25L/Sec.

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V.8 Capacity Utilization and Product Mix
The theoretical production capacity of the proposed foam making line is 150-300 Kg/minute.
However, major factors like foam curing time, foam cutting and/or bonding, mattress covering
and sewing and finishing processes determine the overall production capacity of foam and
mattress factory projects. Foam making line has very huge capacity and the overall production
time should be aligned with the above mentioned factors so as to determine the overall
production of the project. As a result, the virtual appraisal team has assumed different working
days and hours for foam production line and other production determinant factors mentioned
above (i.e. foam curing time, foam cutting and/or bonding, mattress covering and sewing and
finishing processes). Accordingly, the foam making line is assumed to operate 150 days per
annum, while foam-cutting and/or bonding, mattress covering and sewing and finishing
processes is assumed to operate 300 working days.

Considering the economic scale, production management, the market demand projection and the
proportional consumption of foam mattress and related products, the project will start operation
at 40% of its theoretical capacity and increase 10% per annum until attainable capacity of 70% is
reached in the fourth year and remain the same afterwards.

V.9 Production Process and Technology Selection

Solid foam is formed when gas is blown through solidifying plastic. Depending on its ability
retain original shape after compression, solid foam can be classified as either flexible or rigid.

Polyurethane foam is the most widely used flexible foam plastic. It is used to produce a wide
variety of items including bed mattresses, thermal insulation and packaging materials, comfort
cushions and others. During the production process, foam trimmings are generated at the
fabrication and finishing work unit so that additional products can also simultaneously produced
using this byproduct.

The process of flexible polyurethane foam mattress production consists of:

i. Mixing of the raw materials

ii. Foam making, settling and curing
iii. Foam fabrication and finishing.

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i. Mixing of the Raw Materials
During production, the raw materials (TDI, Polyol, and others) are pumped from their own
storage tank to a common mixing chamber. Adequate dispersion can be achieved by the stirring
of high speed impeller installed in the mixer.

ii. Foam Making, Settling and Curing

Due to the foaming effect of the blowing agents, the reacting mixture expands rapidly on ejection
from the mixer. Since the mixture is still in liquid form when pumped to the bottom of the
settling chamber, it picks up the shape of the chamber readily. The foam gradually solidifies
when travelling up the settling chamber by the action of a paper conveyor.

The newly formed foam blocks are still very hot when transported to the storage area. Although
the peripheral of the foam is cooled to room temperature, the centre of the block can still be
hotter than 100 o C. It must be cured at room temperature for at least 18 hours before further
processing. Fully cured foam blocks are either directly delivered to the customers or cut into
smaller sizes according to orders.

iii. Foam Fabrication and Finishing

Foam fabrication means an operation for cutting or bonding flexible polyurethane foam pieces
together or to other substrates.

Depending on the final product there are different foam cutting operations. For this project,
automatic circular cutting machine and vertical cutting machine are included.

 Automatic circular cutting machine

This machine can be used for high volume slitting of foam sheets by cutting several blocks
together in a circular movement.
 Vertical cutting machine
This machine is used for side trimming and slicing of foam blocks and cut cushions and all types
of straight or slant edges.

In finishing part cover cloth preparation and foam covering and sewing are the jobs to be
performed. Cutting tools and sewing machines are to be used in cover cloth preparation. Foam
mattresses are commonly manufactured in 12, 16, and 20 cm thickness, therefore a mattress
filling machine is needed.

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The overall processes flows for foam production are indicated on following figure as follow:

Figure 2 Process flows for the production of the foam mattress

MIXING OF RAW FOAM MAKING, SETTLING FOAM

MATERIALS AND CURING FABRICATION AND

V.10 Raw Material and Source

The main and direct major raw materials required for production of polyurethane foam and
mattresses are:-

6. TDI (Toluen Di-Isocyanate) - The most widely used isocyanides employed in

polyurethane production are toluene diisocyanate (TDI). It is chemical used in the
production of polyurethanes, primarily for flexible foam applications including furniture,
bedding and carpet underlay, as well as packing applications. TDI is the most reactive
Isocyanate employed in flexible polyurethane manufacturing.
7. Polyol – A Polyol is a substance created through a chemical reaction using methyloxirane
(also called propylene oxide). It is found in coal-tar light oil and obtained chiefly from the
processing of petroleum fraction. The polymeric Polyol used in the manufacture of
urethane foams represent a series of synthetic Polyol.
8. Silicon surfactant: Surfactant is an important class of silicones with water soluble
capabilities used for foam that is placed in a form or linear and cured in a high temperature
oven; the silicone is transformed into various forms of low density and high density open
cell foam. Surfactant is used to create emulsions- stable blends of two “unbendable”
materials like oil and water and has the following four main issues in foaming.
o Improved compatibility of raw materials
o Dispersion of inlet gas
o Prevention of coalescence
o Stabilization of bubbles

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 Craft paper- It is a paper which is used for the improvement of the surface characteristics
and edge shape of the block. A roll of baking paper is spooled at the start of the processing
line. This paper moves along a conveyor and brought under the dispensing head. As the
passes under, polyurethane is blown into it. After the expansion reaction begins, a second
top layer of paper is rolled on. Additionally, side paper may also be rolled into the process.
Each layer of the paper contains the polyurethane foam giving it shape.

 Water: Water is also the auxiliary material in foam manufacturing. The water used in the
process is any type of water from the ground or surface, but it must be clean as much as
possible. According to the documents submitted by the promoter shows that the factory has
already secured the water line of high discharge (1.25L/sec).

Raw materials like calcium carbonate and others are also used in the manufacturing of foam.
However, the virtual appraisal team did not consider them since they are possibly causing
permanent deformations and damaging the quality of the final product.

Source of major raw materials are imported from abroad countries like: China, India, Turkey and
so on.

V.11 Environmental Impact Assessment

As per the environmental impact assessment report submitted, the total dust emission, soil, air &
water pollution & others emanate from the factory will not have significant incremental or
cumulative dust impact as far as the mitigation mechanism should be implemented by the
promoter. The study has also approved by Tigray National Regional State Environmental
Protection, Land Administration & Use Agency through its letter ref no KMA/740/H-3/96 dated
on 23/02/2008E.C. Therefore, the promoter should then implement the proposed mitigation
measures discussed in the environmental impact assessment study & CRMD-I also should have a
follow up mechanism accordingly.

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 V.12 Implementation Schedule
The major activities required during the implementation phase are loan processing, installation of
electrical power, building and construction, procurement of planned machinery & equipments,
procurement of vehicles and generator & erection of machinery, procurement of raw materials,
trial production and operation commencement. The implementation activities are expected to
start in September 2016 and will be completed in October 2017. Hence, the overall
implementation works require a period of 14 months. The detail of implementation schedule is
presented below:

Table 5.3: Implementation Schedule

2016 2017
September

September
November

December

February
Sr.

January
October

October
August
March
Type of Activities

April

June
May

July
No.

1 Loan processing
2 Installation Electric Power
3 Building and Construction
Procurement of Machineries
4
& Auxiliary Equipments
5 Procurement of Vehicles
6 Procurement of Generator
Procurement of Imported
7
Raw Materials
Installation of Machineries and
8 Equipments
Recruitment and Training of
9
New Employees
Procurement of Local Raw
10
Materials
Procurement of Office
11
Furniture and Equipments
12 Trial production start-up
13 Operation commencement

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VI. ORGANIZATION, MANAGEMENT AND MANPOWER

VI.1 Organization

Organizational structure defines how activities such as task allocation, coordination and
supervision are directed toward the achievement of organizational aims. It can also be
considered as the viewing glass or perspective through which individuals see their organization
and its environment.

Regarding the project, the organizational structure that shall be employed consist General
Manager at the top. The General Manager with the support of the factory manager is responsible
in planning organizing and monitoring the overall operation of the project. Accordingly, the
organization structure is organized under a General Manager assisted by quality control and
planning sections. Furthermore, under the general manager there will be Factory Manager. Under
the Factory manager there are four departments namely, Production & Technical Dep’t, HR &
Administration Dep’t, Marketing Department, and Finance Department. Under the four
Departments, there are eight divisions which are directly related with day to day operational
activities. The proposed organizational chart is depicted as follows:-

Figure 6.1: Organizational Structure of the Project

General Manager

Quality Control Section

Factory Manager
Production &
HR & Admin Marketing &
Technique Finance Dep't
Dep't Sales Dep’t
Dep’t Administra General
Production Sales
tion Accounting
Division Division
Division Division

Cost &
Techinical HR Purchasing
Budget
Division Division Division
Division

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VI.2 Project Management

The general manager and the owner of the project, Ato Dawit K/Mariam Gesesse has academic
background of grade 12th. As per the due diligence report shows, he has more than 15 years of
experience in his family business that engaged in house and office furniture business at
different positions. Therefore, even though his work experience is expected to help him to
manage the project with the sense of ownership, it is recommended that the promoter has to
hire other qualified and experienced managers and professional for the technical supports. The
general manager needs strong assistance from other department managers.

The intended Factory Manager, Ato W/Giorgis G/Medhin, as it is observed from due diligence
assessment report, he has Diploma in Computer Science and in Banking and Finance from SOS
Computer Training Center & Mekelle University respectively. He has also BA degree in
Economics from Mekelle University. As his Curriculum vitae shows, he has about 24 years of
work experience and out of which he has five years experience in teaching service, thirteen
years of experience in Banking service and six years of experience in consulting firms.

Since foam and spring mattress production requires relevant educational background and
experience, the promoter should hire professionals with relevant educational background and
work experience especially, BSC in Industrial Chemist, Chemical & Mechanical Engineering
for the Production & Technical Department. Moreover, the project can hire additional skilled
and semi-skilled professionals.

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VI.3 Man Power Requirement

For smooth operation of factory both effectively and efficiently, Manpower plays a fundamental
role in the successful manufacturing of any factory including foam and spring mattress
manufacturing. The project requires experienced professionals especially in designing, producing
and packaging. Hence, technical person should be there with competent and qualified
management staff at commissioning and operational phases. Since the project need professional
person, there is availability of skilled and semi-skilled man powers in the country so that project
can hire adequate skilled, Semi-skilled professionals and daily laborers from local markets.
Therefore, significant problem is not expected in hiring skilled staff as well as semi-skilled
manpower in local labor market. The project must plan to pay competitive salary and wages for
employees to attract and be competent in the local market. Accordingly, the project is expected
to create job opportunities for 76 permanent staffs and additional job opportunities for various
daily laborers with annual salary of Birr 2,748,638. For detail information, please visit the
Human Resource and Salary Expense Determination from the Annex part of this appraisal report.

VI.4 Manpower Training

The management of the project has to give due attention to human resource on job and off job
training. Beside this, the technical persons are expected to get training during machine
installation and commissioning stage. However, training by itself is not the end and the project
will play major role during implementation and follow up stage. Furthermore, the promoter
should have a regular plan to assess knowledge gap and fill it. Especial attention has to be
given for staffs like technical maintenance, production and quality control persons.

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VII. FINANCIAL ANALYSIS

7.1 Fund Allocation

The total project cost is estimated to Birr 71,093,134. Out of the total investment cost, Birr
57,094,544 (80%) is fixed assets, Birr 4,347,062 (6%) is pre-production cost and interest, and the
remaining Birr 9,651,527 (14%) is planned to be working capital cost of the project. The
promoter has already invested Birr 10,440,865 (15% of the total project cost) for building and
construction, land lease down payment and pre production expenditure, whereas the remaining
Birr 60,652,269 (85% of the total project cost) is the planned investment cost. The detail is
depicted on the below table.

Table 7.1: Fund Allocation

Executed Planned Total

Sr. Percentage
Description Investment Investment Investment
No. Share (%)
Cost (Birr) Cost (Birr) Cost (Birr)
1 Land Lease Down Payment 52,500 - 52,500
2 Building and Construction 9,684,992 26,055,271 35,740,263
3 Machineries and Equipments - 13,743,438 13,743,438
4 Auxiliary Equipments - 2,247,531 2,247,531
5 Vehicle - 3,802,142 3,802,142 80%
6 Generator - 680,000 680,000
7 Office Furniture & Equipments - 459,792 459,792
8 Electric Installation - 368,878 368,878
Sub-total 9,737,492 47,357,052 57,094,544
9 Pre-production Cost 703,373 - 703,373
10 Pre-production Interest - 3,643,690 3,643,690 6%
Sub-total 703,373 3,643,690 4,347,062
11 Working Capital - 9,651,527 9,651,527
14%
Sub-total - 9,651,527 9,651,527
Total 10,440,865 60,652,269 71,093,134 100%
Percentage Share (%) 15% 85% 100%

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 7.2 Source of Fund

Since the requested loan is meant for new project establishment, the project is expected to
contribute 25% of total project cost which amounted to Birr 17,773,283. Among this, the
promoter has already invested Birr 10,440,865 on building and construction, land lease down
payment and pre production expenditure. To maintain the minimum debt-equity ratio, the
promoter is shall raise additional equity of Birr 7,332,418 in cash. The remaining 75% of the
total project cost which amounted to Birr 53,319,850 will be financed by DBE loan. The detail
source of fund is depicted on the table below:

Table 7.2 Source of Fund

Owner's Equity
Total Equity DBE
Sr. Existing Contribution Total
Description Contribution Loan
No. Investment In Cash (Birr)
(Birr)
(Birr) (Birr)
(Birr)
1 Land Lease Down Payment 52,500 - 52,500 - 52,500
2 Building and Construction 9,684,992 3,319,851 13,004,843 22,735,420 35,740,263
3 Machineries and Equipments - - - 13,743,438 13,743,438
4 Auxiliary Equipments - - - 2,247,531 2,247,531
5 Vehicle - - - 3,802,142 3,802,142
6 Generator - - - 680,000 680,000
7 Electric Installation - 368,878 368,878 - 368,878
8 Office Furniture & Equipments - - - 459,792 459,792
Sub-total 9,737,492 3,688,729 13,426,221 43,668,323 57,094,544
9 Pre-production Cost 703,373 - 703,373 - 703,373
10 Pre-production Interest - 3,643,690 3,643,690 - 3,643,690
Sub-total 703,373 3,643,690 4,347,062 - 4,347,062
11 Working Capital - - - 9,651,527 9,651,527
Sub-total - - - 9,651,527 9,651,527
Total 10,440,865 7,332,418 17,773,283 53,319,850 71,093,134
Debt-Equity Ratio 25% 75% 100%

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7.3 Expected Financial Results
Here, our objective is to provide information about the financial position, performance and
changes in financial position of the project to make rational economic decision. Hereunder, we
will try to look Profit/loss or income statement forecast, cash flow and balance sheet projection,
financial rate of return and sensitivity of the project for potential variables.

7.3.1 Profit/loss forecast

Profit/loss forecast presents the results of project’s operations during a period of time. It shows
income earning from the project and expenses incurred in attaining the income. Accordingly, the
projected profit/loss statement of the project shows that the project will earn a profit of
Birr 15,421,965 during its first year and earn profit of Birr 27,559,050 at the end of 10th year of
projection. This indicates that the project could run profitable business venture and can maintain
objective of its establishment at competitive quality and price.

7.3.2 Cash flow forecast

Cash flow projection provides a look at the movement of cash in and out of the project. It is
important in determining whether or not a project has enough cash to pay its bills, handle
expenses and acquire assets. Thus, it is important to give due attention to identify whether the
total inflows of the project have the capacity to cover all cash outflows during its operational
period. Unless, the project will faces liquidity crisis and fail before achieving its objective of
establishment.

Based on this fact, the forecasted cumulative cash balance shows Birr 18,222,951 during the first
year and will grow up to Birr 205,588,286 at the end of project period, demonstrating that the
project will not face liquidity constraint to finance its operational costs as well as debt obligation.

7.3.3 Balance Sheet Projection

Balance Sheet Projection is used to provide insight into assets and debts of the project at a
particular point in time. Total assets of the project expected to rise from Birr 71,093,134 during
the first operational year to Birr 238,403,991 at the 10th end project year.

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7.3.4 Financial Rate of Return

Net Present Value (NPV) Internal Rate of Return (IRR)

Before Tax 170,569,464 50
After Tax 122,951,752 44

7.3.5 Sensitivity Analysis

Under sensitivity analysis we tried to made assessments that compares the expected results with
possible results. The profitability of the project will vary under various circumstances that could
possibly happen. Thus, the project's sensitivity to adverse circumstance is analyzed from three
different scenarios: decrease in sales revenue by 10%; increase in operating costs by 10% and
increase in investment costs by 10%.

i. Decrease on Revenue
Based on financial our findings, when revenue decreases by 10% after tax IRR of the project
reduced from 44 % to 34%. From this, we can say that the project is viable and can achieve its
objective of its establishment even in an adverse circumstance that may happen and trigger to
reduce its revenue by 10%.

ii. Increase on operating Cost

Also, if the operating costs of the project may increase by 10% due to unforeseen circumstances;
other things remain constant, after tax IRR of the project anticipated to reduce to 39%. This
means, still the project has the capacity to cover its costs and make profit for stakeholders.

iii. Increase on Investment

When investment costs increase by 10%, after tax IRR of the project anticipated to be 40%.

To sum up, the project is more sensitive to the sales performance. As a result, the project should
give more focus on pricing strategy and try to maximize its sales performance as much as
possible. Whatsoever will happen, the project has the capacity to absorb external shock and
attain its objectives of its establishment.

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VIII. SOCIO ECONOMIC BENEFIT

Establishment and development of such manufacturing industry is very important and will have
different socio-economic benefits. Therefore, it is possible to state enormous reasons. Among,
the followings are some of it:

 Increase Foreign Currency Saving: Foam & foam products will contribute significant
foreign currency earnings by substituting the imported products.

 Create Job Opportunity: The contribution of the project in other social and economic
aspect as job opportunity creation for a lot of workforces and there by salary/wage
income generation for the employees is also significant. The project is expected to create
permanent employment opportunity for about 76 skilled, semi-skilled and unskilled
workers.

 Source of Government Income: The project will also generate substantial revenue to the
government in the form of taxes. During its 10 year, the project will pay an average of
Birr 14.72 million to the government in the form of profit tax.

 GDP Contribution: The project is the major contributor for economic growth of the
nation in manufacturing sector.

 Knowledge Transfer: It helps to transfer new technologies and knowhow for the
employees and the promoter.

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IX. CONCLUSION AND RECOMMENDATION

9.1 Conclusion

As discussed in different chapter of this appraisal report, the project will have a considerable
socio-economic benefit to the country like creating job opportunities to the local people and
generate revenue to the government in the form of taxes, technology and knowhow transfer,
import substitution & foreign currency saving.

The project has planned to produce quality products, which generate attractive returns to the
promoter and also to the country. Since the project’s product will be consumable by individuals
and industries, the product of the project will have adequate market.

Accordingly, the foam and spring matters manufacturing project initiated by Ato Dawit
K/Mariam is one of the aforesaid projects that will also increase productivity as well as domestic
production of the country.

All in all, while we conducted essential analysis and financial projection, the assigned appraisal
team found that the project is viable in all aspects of analysis. As a result, the assigned appraisal
team suggested financing this project is creditable.

9.2 Recommendation
Thus, considering all the above findings, the assigned appraisal team found that financing the
proposed project for its implementation is commendable and appropriate. Therefore, the team
has proposed total loan amount of Birr 53,319,850 and approved at its level with the following
terms and conditions:

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 9.3 Terms and Conditions
9.3.1 Terms

a) Disbursement Condition
 Equity Release Schedule

Amount to Balance in
Equity Commitment
be Released To be Months to be
Release Purpose of Release (Birr) Disbursed Disbursed
Plan
(Birr) 7,332,418
To be blocked in
Pre-production Interest 3,643,690 To DBE cash following loan
contract registration
Electric Installation Cost 368,878 To EEU
-
1st Building and Construction
Equity (12.74% of planned building To the Nov-16
Release 3,319,851
and construction cost to be Contractor
released with loan)
Total Equity to Contributed in Cash 7,332,418

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  Loan Disbursement Schedule
Amount Balance in
to be Commitment Months to be
Disbursemen To be Condition for
Purpose of Disbursement Disbursed (Birr) Disbursed
t Plan Disbursed Disbursement
(2016/17)
53,319,850
(Birr)
Building & Construction (17.26% of planned building & construction
4,496,731 To the Contractor
cost to be disbursed with equity)
Following loan contract
1st Procurement of Machineries and Equipments (30% advance payment
4,123,031 To the Supplier registration and fully
Disbursemen for LC opening) 44,025,829 Nov-16
blocked the required
t Procurement of Auxiliary Equipments (30% advance payment for LC
674,259 To the Supplier equity contribution.
opening)
Sub-total 9,294,021
nd
2 Building & Construction (30% of planned building & construction cost) 7,816,581 To the Contractor After verification of
Disbursemen Procurement of Vehicles (30% advance payment for LC opening) 1,140,643 35,068,605 To the Supplier effective utilization of Jan-17
t Sub-total 8,957,224 previous disbursement
Building & Construction (30% of planned building & construction cost) 7,816,581 To the Contractor
Procurement of Generator (100% of Generator Cost) 680,000 To the Supplier After verification of
3rd
Procurement of imported raw materials (30% advance payment of effective utilization of
Disbursemen 2,196,028 24,375,995 To the Supplier Mar-17
imported raw materials cost for LC opening) previous
t
10,692,61 disbursements.
Sub-total
0
Building & Construction (10% of planned building & construction cost) 2,605,527 To the Contractor
Procurement of Machineries and Equipments (Remaining 70%
9,620,406 To the Supplier
machineries and equipments cost payment) After verification of
4th Procurement of Auxiliary Equipments (Remaining 70% of Auxiliary effective utilization of
1,573,272 To the Supplier
Disbursemen Equipments Cost for LC settlement) 7,915,290 previous disbursements May-17
t Procurement of Vehicles (Remaining 70% of Vehicles Cost for LC and arrival of imported
2,661,500 To the Supplier
settlement) items.
16,460,70
Sub-total
5
Procurement of Office Furniture & Equipments 459,792 To the Supplier
Working Capital After verification of
5th Procurement of imported raw materials (Remaining 70% of imported effective utilization of
5,124,066 To the Supplier
Disbursemen raw materials cost for LC settlement) - previous disbursements Jul-17
t Procurement of local raw materials (100% of local raw material & and arrival of imported
481,323 To the Supplier
electric consumption cost) raw materials.
Working capital for electric consumption cost and overhead costs 1,850,109 To the Promoter

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coverage
Sub-total 7,915,290
53,319,85
Total -
0

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b) Repayment Schedule
The principal loan shall be repaid on a quarterly basis within 6 (six) years. Bringing a new
product to market is fraught with unknowns, uncertainties, and frequently unknowable risks. As
a result, the loan repayment capability of the project will be low during initial stage. Considering
this, the first two installments shall be Birr 1,000,000, the next one installment shall be Birr
3,207,350 and the remaining 15 (fifteen) installments shall be Birr 3,207,500. The first
repayment begins on May 31, 2018 and the last will be made on March 31, 2024.

c) Interest Rates and Other Charges

- 12% pre-operating interest rate p.a. on the outstanding loan balance to be paid every–
four-months starting from January 31, 2017.
- 12% interest rate p.a. on the outstanding loan balance to be paid every–four-months
starting from January 31, 2018.

d) Commitment Charge Payment

0.5 % per annum commitment charge shall be paid on balance in commitment.

9.3.2 Conditions

i) General Condition
1) Collateral: - First degree mortgage on all fixed assets of the project.
2) Insurance: - Purchase proper insurance policy for the entire fixed assets and inventories
of the project with DBE as a co-beneficiary.
3) Current Account: - The promoter should maintain current account with DBE.
4) Record Keeping: - The promoter should maintain proper record keeping system.
5) L/C Opening: - The promoter should use DBE for its L/C facility.

ii) Specific conditions

1) The promoter should deposit Birr 7,332,418 in a blocked account for pre-operating interest,
electric installation and partial building & construction cost.
2) EEU has agreed to supply 120KW of electric power. However, the required electric power is
205KW. Thus, EEU has to confirm its willingness to supply the deficit of electric power, and the
promoter should submit written consent to cover the cost of additional electric power installation.
3) The promoter has to bear minor cost variation that might occur during project implementation.
X. ANNEXES

- Existing & Planned Building & Construction Costs

- Planned Machinery & Equipment
- Planned Vehicles & Generator
- Planned Office Furniture & Equipment
- Basic Assumption
- Direct Raw Material Determination
- Human Resource and Salary Expense & Benefits Determination
- Overhead Cost Determination
- Operating Cost Determination
- Working Capital Determination
- Depreciation and Amortization Schedule
- Profit/Loss Statement Projection
- Cash Flow Statement Projection
- Balance Sheet Projection
- Calculation of Financial Internal Rate of Return
- Loan Repayment Schedule

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