236.

PROFILE ON GAS/ELECTRIC STOVE

 236-2
TABLE OF CONTENTS

PAGE

I. SUMMARY 236-3

II. PRODUCT DESCRIPTION AND APPLICATION 236-3

III. MARKET STUDY AND PLANT CAPACITY 236-3

A. MARKET STUDY 236-3
B. PLANT CAPACITY AND PRODUCTION PROGRAMME 236-5

IV. MATERIALS AND INPUTS 236-6

A. MATERIALS 236-6
B. UTILITIES 236-6

V. TECHNOLOGY AND ENGINEERING 236-6

A. TECHNOLOGY 236-6
B. ENGINEERING 236-7

VI. MANPOWER AND TRAINING REQUIREMENT 236-7

A. MANPOWER REQUIREMENT 236-7
B. TRAINING REQUIREMENT 236-7

VII. FINANCIAL ANALYSIS 236-10

A. INVESTMENT 236-10
B. PRODUCTION COSTS 236-11
C. FINANCIAL EVALUATION 236-12
D. ECONOMIC BENEFITS 236-13
 236-3
I. SUMMARY

This profile envisages the establishment of a plant for the production of 6000
gas/electrical stove per year.

The present demand for gas/electric stove is estimated at 3000 pieces per
annum. The demand is expected to grow to 3509 and 4440 pieces by the
year 2000 and 2006, respectively.

The total investment requirement is estimated at Birr 1193.53 thousand out of

which Birr 83.6 thousand is for machinery and equipment.

The plant will create employment opportunities for 21 persons.

The project is financially viable with an internal rate of return (IRR) of 46.76%
and net a present value (NPV) of Birr 4502.5 thousand discounted at 10.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Gas/Electric stoves are cooking ranges used for cooking a number of items.
They are used in hotels, messes, restaurants, hostels, and other places for
cooking food. They are operated by electrical power or L.P. gas. Usually the
top of gas/electric stoves (cooking ranges) consists of four heating plates
individually controlled by rotary switches.

The proposed project profiles deals with cooking ranges operated by L.P. gas.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Present Supply and Demand

Demand for stoves in Ethiopia is met through imports originating from various
countries, although the Peoples Republic of China appears to have dominance
in the market as evidenced by the huge import of small kerosene stoves from
that country. For instance, in the year 1985, out of 107379 pieces of imported
stoves, 106049 were from China. In 1987 as well, out of an import figure of
293228 pieces, 289101 were of Chinese make.

Despite the relatively large import of stoves of all kinds, gas and electric
stoves, including the table top ones, however, represent a small fraction of
the total, the market being dominated by kerosene stoves. The import data
of gas and electric stoves, which is shown in Table 3.1, is not marked by a
secular growth pattern. The highest import registered was 9296 pieces in
1990, while the lowest, i.e. 587 pieces was in 1991.

When the data set is exponentially smoothed with a smoothing factors of 0.2
it yields a forecast of 2954 pieces. The mean import over the same span of
time, however, is 4162 pieces. On the assumption that the exponentially
smoothed import data will reasonably approximates the demand, it is
considered that the present effective demand for gas and electric stoves is in
the order of 3000 pieces per annum.
 236-4

Table 3.1
IMPORT OF GAS & ELECTRIC STOVES (PIECES)
YEAR ACTUAL VALUE EXPONENTIALLY
SMOOTHED
VALUE
1985 1330 -
1986 8484 1330
1987 6426 2761
1988 3484 3494
1989 7592 3492
1990 9296 4312
1991 584 5309
1992 974 4364
1993 2430 3686
1994 1020 3435
1995 - 2954

Source: External Trade Statistics of the Excise Tax

2. Demand Projection

The past decade has witnessed a marked shift in the urban population's fuel
source utilization from fuel wood to gasoline and electricity. This change in
the pattern of energy consumption is generally perceived as a favorable to
environmental conservation since it will have significant contribution in
stemming the tide of deforestation from which the country has suffered a lot.
The demand for gas and electric stoves is thus expected to grow parallel to
the urban population growth rate which is 4% per annum, and the resulting
projection is shown in Table 3.2.

3. Pricing and Distribution

Table-top gas and electric stoves currently sell in the range of Birr 650 and
1000, averaging about Birr 800. Reducing this by 15% to take account of
distributor's margin, the import parity price is considered to be about Birr 680
per piece.

The product can be distributed through the existing wholesale and retail
channels.
 236-5

Table 3.2
DEMAND PROJECTION OF GAS AND ELECTRIC STOVES
YEAR PROJECTED DEMAND
(PIECES)
1997 3120
1998 3245
1999 3374
2000 3509
2001 3650
2002 3796
2003 3948
2004 4106
2005 4270
2006 4440

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Production Capacity

The envisaged plant will have an annual production capacity of 6000o stoves.
The plant will operate single shift, 8 hours a day, and for 300 days a year. The
working days are set by deducting Sundays and public holidays in a year and
assuming that maintenance works will be carried out during off-production
hours.

2. Production Programme

The production programme of the envisaged plant is worked out based on the
forecasted demand for the product (see Table 3.3)

Table 3.3
PRODUCTION PROGRAMME

YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Production Nos. 3300 3500 3600 3700 3900 4000 4200 4400 4600 4800 4950 5100 5400 5600 5800

Capacity 55 58 60 616 65 60.6 70 73 76.6 80 82.5 85 90 93 96.6

Utilization (%)
 236-6

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw materials required by the plant are mild steel plates, stainless
steel sheets, angles, rods, grills, burners and knobs. Hinges, tubes, and
packaging materials are auxiliary materials required by the plant. The list of
raw and auxiliary materials is shown in Table 4.1.

Table 4.1
ANNUAL MATERIAL REQUIREMENT
AT 96.6% CAPACITY UTILIZATION
NO DESCRIPTION QUANTITY COST('000
BIRR)

1 Mild steel plate, 50 TONS 98.16

stainless steel
sheets, angles,
rods, grills
2. Burners with tubes 24000 nos 785.27
3. Knobs, hinges, 24000 nos 15.71
etc...
4. Glass wool 10.31
insulation
5. Packaging " 5.15
material
Total (FOB) - 914.60
Freight, insurance, - 128.80
bank charges,
etc...
Total cost - 1958

B. UTILITIES (AT 96.6% CAPACITY UTILIZATION)

Electricity and water are the inputs required by the plant. Electricity required
by machinery and equipment, lighting and other auxiliary services is
estimated to be 30 kw, and at 80% efficiency, the annual energy consumption
will be 558400 kwhrs, which costs Birr 14815. Annual water consumption will
be 485 m3 which costs Birr 485 at the rate of Birr 1.0 per m 3. Thus, The total
expenditure on plant utilities will be Birr 15300.
VI. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The major operations involved in manufacturing gas stoves consist of:-

 236-7

- Design and marking as per design

- Shearing of sheets and cutting sections to size
- Welding of parts and components
- drilling, grinding
- assembly
- finishing, painting and baking by oven.

It can be observed that the manufacturing process is more of a fabrication

activity. Each activity indicated above can thus be performed repetitively.

Since the end product has got several components to be assembled together
it is advisable to check them at every stage of operation. In press machines
strict vigilance is necessary to assure quality of finish by way of proper setting
of tools and timely maintenance of them.

2. Source of Technology

The technical data and information are compiled from a document provided
by the National Research Development Corporation of India.

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required by the plant, together with
quantity and costs is presented in Table 5.1. The total cost of machinery and
equipment is estimated at Birr 83.6 thousand out of which Birr 63.6 thousand
will be required in foreign currency.

2. Building and Civil Works

The total area required for land site will be 1000 m 2. The built up area for
production offices and other facilities will be 400 m2. Estimating that a unit
area (per m2) of building costs Birr 1400, the total expenditure on plant
building will be Birr 560,000. The total expenditure on land as per Region 14
lease rate will be Birr 260,000. Thus, the total expenditure on land, building
and civil works is Birr 820,000.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The complete list of manpower required by the plant is presented in Table 6.1.

B. TRAINING REQUIREMENT

It is required that the production supervisor and skilled workers be provided

with short term training on fabrication of metals. For this, a training
programme of four to six weeks be devised and executed. A total of Birr
30,000 will be allotted to cover the training expenses.
 236-8

Table 5.1
LIST OF MACHINERY AND EQUIPMENT

NO ITEM QUANTITY
(NOS)
1. Shearing machine 2
(Power-operated)...
2. Hand-operated lever 2
type shearing machine
3. Flexible shaft grinder 2
4. Portable drilling m/c 2
5. Arc welding m/c 2
6. Gas 2
7. Double-ended bench 1
grinder
8. Spray painting 1 unit
equipment (with
compressor, spray gun,
motor, etc)...
9. Baking oven (oil fired) 2
10. Cutting tools, hand set
tools, etc...
 236-9
Table 6.1
MANPOWER REQUIREMENT

NO DESCRIPTION NO. MONTHLY ANNUAL COST

SALARY/WAGE

1. Plant Manager 1 1400 16800

2. Production supervisor 1 1100 13200

3. Sales Manager 1 700 8400

4. Accountant 1 700 8400

5. Typist 1 300 3600

6. Clerk 1 200 2400

7. General services 4 160 1920

8. Store man 1 500 6000

Sub-total 11

9. Skilled workers (Operators 5 350 21000

and Technicians)

10. Semi-skilled 5 200 12000

workers(Assistant
Operators and
Technicians)

Sub-total 10 - 33000

Workers' benefit (25% bs) - - 23430

Training cost - - 30000

Total cost 21 147150

 236-10

VII. FINANCIAL ANALYSIS

The financial analysis of gas/electric stove is based on the data provided in

the previous chapters and the following assumptions.

Construction period 2 years

Source of capital 40% equity
60% loan
Tax holidays 3 years
Bank interest rate 10.5%
Discount Cash flow 10.5%
Value of land Based on lease rate of
Region 14
Repair and maintenance
Spare parts 2% of fixed investment

Depreciation

Machinery & equipment 10%

Vehicle 20%
Office furniture 10%
Pre-production costs 20%
Buildings 5%

Working Capital Minimum days of coverage

Accounts receivable 30 days

Cash in hand 30 "
Raw material
Foreign 120 "
Local 45 "
Work in progress 11 "
Finished products 15 "
Accounts payable 30 "

A. INVESTMENT

The total investment cost of the project including working capital (See Table
7.l) is estimated at Birr 1993.53 thousand. Owners are assumed to contribute
40% of the finance in the form of equity while the remaining 60% is expected
to be financed by long term bank loan.
 236-11
Table 7.l
TOTAL INITIAL INVESTMENT
IN 'OOO BIRR
No. Items L.C F.C Total %

1 Land 81.46 - 81.464 6.83

2 Building & civil works 560.0 - 560.0 28.09
3 Office equipment 50.0 - 50.0 2.51
4 Vehicle 300.0 - 300.0 15.04
5 Plant machinery & equipment 20.0784 63.6 83.6 4.19
Total fixed investment cost 1011.46 63.6 1075.06 53.93
6 Pre-production capital expenditure* 173.74 - 173.74 8.71
Total initial investment 1185.20 63.6 1248.80 62.64
7 Working capital at full capacity 86.93 657.8 744.73 37.36

Total Investment 1272.13 721.4 1993.53 100

The major component of the investment are plant machinery and equipment,
building and civil works, pre production expenses accounting for 4.2% 28%
and 8.7% respectively. The foreign component of the project accounts for
36.2% of the total investment.

B. PRODUCTION COSTS

The total production cost at full capacity operation is estimated at Birr

2245.379 thousand. Raw materials and utilities account for 87.9% of the
production costs and repair and maintenance for 1%. The production costs at
90%, 93% and 96.6% capacity utilization is shown in Table 7.2.

Table 7.2
PRODUCTION COST
'OOO BIRR
Items Year 15 16 17

Raw Materials 1822.9 1890.5 1958

Utilities 14.24 14.77 15.3
Energy - - 41.25
Labour, direct 41.25 41.25 21.5
Repair, maintenance 20.02 20.76 -
Spares - - 16.5
Factory overhead 16.5 16.5 2052.55
Factory costs 1914.98 1983.76 159.4
Administrative overhead 159.4 159.4 33.43
Depreciation 33.4 33.4 -
Financial costs - -

*
Cost of feasibility study, licensing, training, commissioning and interest
during construction.
 236-12

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement (see Table 7.A.1) the project will
generate profit beginning from the first year of operation. Important ratios
such as the percentage of net profit to total sales, net profit to equity (Return
on equity) and net profit and interest on total investment (return on total
investment) are 30.3%, 146.6% and 46.7% in the first year of operation. The
income statement and other profitability indicators show that the project is
viable.

2. Break-even Analysis

The break-even point of the project is estimated by using income statement

projection.

BEP = Fixed Cost = 392.96 = 392.96

Sales - Variable cost 2652-1341.3 1310.7

The project will break even at 30% of capacity utilization.

3. Payback Period

Investment cost and income statement projection are used in estimating the
project payback period. The project will pay back fully the initial investment
less working capital in 2 years.

4. Simple Rate of Return

Simple rate of return is the ratio of net profit after tax plus interest to the total
profit calculated for one year at full capacity utilization.

SRR = 1104 x 100

1193.5

The simple rate of return at full capacity is 92%.

5. Internal Rate of Return and Net Present Value

Based on cash flow statement (see Table 7.A.2) the calculated IRR of the
project is 46.7% and the net present value at 10.5% discount is Birr 4502.5
thousand.
 236-13

D. ECONOMIC BENEFITS

The project can create employment opportunities for 21 people. In addition to

increasing the supply of goods to the domestic market, the project will
generate Birr 5444.3 thousand in terms of tax revenue. Moreover the
regional government can collect employment and income tax and sales tax
from the project thereby increasing its tax base.
 APPENDIX 7.A

FINANCIAL ANALYSIS SUPPORTING TABLES