37.

PROFILE ON WOOLEN FABRICS

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TABLE OF CONTENTS

PAGE

I. SUMMARY 37-3

II. PRODUCT DESCRIPTION & APPLICATION 37-3

III. MARKET STUDY AND PLANT CAPACITY 37-4

A. MARKET STUDY 37-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 37-7

IV. MATERIALS AND INPUTS 37-8

A. RAW & AUXILIARY MATERIALS 37-8
B. UTILITIES 37-8

V. TECHNOLOGY & ENGINEERING 37-9

A. TECHNOLOGY 37-9
B. ENGINEERING 37-11

VI. MANPOWER & TRAINING REQUIREMENT 37-15

A. MANPOWER REQUIREMENT 37-15
B. TRAINING REQUIREMENT 37-15

VII. FINANCIAL ANLYSIS 37-17

A. TOTAL INITIAL INVESTMENT COST 37-17
B. PRODUCTION COST 37-18
C. FINANCIAL EVALUATION 37-19
D. ECONOMIC BENEFITS 37-21
I. SUMMARY

This profile envisages the establishment of a plant for the production of woolen fabrics
with a capacity of one million sq.mt per annum.

The principal raw material required is wool yarn which have to be imported.

The present demand for the proposed product is estimated at 1.78 million sq.mt per
annum. The demand is expected to reach 3.2 million sq.mt by the year 2020.
 37-3

The total investment requirement is estimated at about Birr 17.59 million, out of which
Birr 1.18 million is required for plant and machinery. The plant will create employment
opportunities for 54 persons.

The project is financially viable with an internal rate of return (IRR) of 25.52 % and a net
present value (NPV) of Birr 14 million, discounted at 8.5 %.

The project has forward linkage with the garment industry. The establishment of such
factory will have a foreign exchange saving effect to the country by substituting the
current imports. Moreover, there is a considerable export potential.

II. PRODUCT DESCRIPTION AND APPLICATION

Woolen fabrics, such as tweeds, are woven from bulky yarns containing short wool fibers
arranged at random, so that the fabric is relatively thick and has a fuzzy surface. Worsted
fabrics, such as gabardines, are woven from yarns composed of longer, thinner wool
fibers, tightly twisted for a smooth surface.

Woolen fabric is made by the method of interlacing two sets of woolen yarn threads
called the warp and the weft. The warp threads form the base for the weaving; they are
arranged parallel to one another and held in tension on a loom. The weft is a single thread
that is passed over and under the warp threads in a systematic way to create a solid or
patterned piece of cloth.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

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At present the local demand for woolen fabric is met through import. Ethiopia imports a
variety of woolen fabrics from a number of countries. The types of woolen fabrics
imported include bleached, unbleached, dyed and printed fabrics of wool. Imported
quantity of the various types of woolen fabrics is shown in Table 3.1.
Table 3.1
IMPORT OF WOOLEN FABRICS

Year Quantity Quantity

( kg) ('sq.mt)
2000 91 455
2001 4,734 23,670
2002 1,311 6,555
2003 311,486 1,557,430
2004 773,926 3,869,630
2005 171,376 856,880
2006 43,953 219,765
Source: - Compiled From Customs Authority.

Note: - The unit of measure for the import data obtained from Customs Authority is in
weight. To convert in to sq.mt a conversion factor of 1 sq.mt=200 grams is
applied.
As could be seen from Table 3.1, import of woolen fabrics fluctuates from year to year.
The lowest level of import was in year 2000 which is 455 sq.mts while the highest was
during 2004 (3,869,630 sq.mts). The years in which recorded import figures were
unusually low or high probably indicate that the high imports in some years were used as
a buffer stock for the following years.

In the absence of a clear trend in the imported quantity of the products, the average of the
most recent 3 years covered by the data set is assumed to reflect the effective demand for
year 2006. Moreover, the average growth rate of urban population, which is the major
user of the product i.e. 4%, is used to estimate the present (2008) effective demand for the
product. Accordingly, taking the average import of 2004 – 2006 as a base and applying
4% growth rate, the present effective demand for is estimated at 1,783,297 sq.mts.
 37-5

.
2. Projected Demand

The demand for woolen fabrics is influenced mainly by population growth and income as
well as the development of the garment sector, which uses the fabrics as raw material. In
addition the recent opportunities created for export market to Europe and U.S.A has a
significant impact on the growth of demand. Considering this situation, an annual
average growth of 5%, which is slightly higher than the growth rate of urban population
(4%), is used for demand projection (see Table 3.2).
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Table 3.2
PROJECTED DEMAND FOR WOOLEN FABRICS (SQ.MT)

Projected
Year Demand
2009 1,872,462
2010 1,966,085
2011 2,064,389
2012 2,167,609
2013 2,275,989
2014 2,389,789
2015 2,509,278
2016 2,634,742
2017 2,766,479
2018 2,904,803
2019 3,050,043
2020 3,202,545

3. Pricing and Distribution

The price of woolen fabrics varies according to their finishing type. Woolen fabrics to be
produced could be bleached, unbleached, dyed or printed. Based on the market
observation an average price of Birr 22 per sq.mt is adopted for financial analysis.

Currently, distribution of fabrics is undertaken by long established wholesalers, most of

them located at Market areas of Addis Ababa and major trading centers of big towns.
 37-7

B. PLANT CAPACITY & PRODUCTION PROGRAMME

1. Plant Capacity

The market study above indicates that the demand of woolen fabrics in year 2009 will be
1,872,462 square meters, while this figure will grow to 2,509,278 square meters by the
year 2015, and to 4,087,349 square meters by the year 2025. Based on this study, the
production capacity of the envisaged plant is determined to be one million m 2. It is
assumed that the woven fabric will have a dimension one meter by one meter.

The plant will operate double shift of 16 hours a day, and for 300 days a year.

2. Production Programme

The plant will start operation at 75% of its rated capacity in the first year, and will raise
its production to 85% and 100% in the succeeding years.

Table 3.3
PRODUCTION PROGRAMME

Description Year
1 2 3 and above
Capacity utilization (%) 75 85 100
Production( in m2) 750,000 850,000 1,000,000
Woolen fabric: 1xb=(10mnx1)m2
 37-8

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw material required for the production of Woolen fabrics is woolen yarn
which can be obtained from foreign markets. Auxiliary materials required for the
envisaged plant include: dye stuffs, printing ink, and other auxiliaries. These are also
procured from foreign markets. Annual requirement of raw and auxiliary materials is
indicated in Table 4.1 below.

Table 4.1
RAW & AUXILIARY MATERIALS REQUIREMENT & COST

Sr. Description Qty Cost in ‘000

No. (tonnes) Birr
FC LC TC
A. Raw Materials

1 Woolen Yarn 250 12,750 2,250 15,000

B. Auxiliary Materials

1 Dyestuffs Lumpsum 50 20 70

2 Printing ink Lumpsum 25 10 35

3 Other auxiliary Lumpsum 60 5 65

Total Cost 12,885 2,285 15,170

B. UTILITIES

In puts required for the proposed plant include: electricity, water and fuel oil. Electricity
is required to drive production equipment, for lighting and other purposes. Water is
required to produce steam, for drinking and for general purposes. Fuel oil is used to fire
 37-9

steam generator. Annual requirement of utilities at full production capacity of woolen

fabrics plant is given in Table 4.2.

Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST

Sr. No. Description Qty Cost (Birr)

1 Electricity (kWh) 500,000 236,800
2 Water (m3) 15,000 48,750
3 Fuel Oil(lt) 20,000 116,800
Total cost 402,250

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

The production process of woolen fabrics consists of the following unit operations:

a) Warping
b) Sizing
c) Reeding
d) Weft prim winding
e) Weaving
f) Shearing
g) Inspection
h) Folding
i) Packing

Warping: - This is a process of preparing warps for a loom. The wool yarn of
appropriate size is wound by warping equipment.
 37-10

Sizing: - This is to align and prepare the weaver’s beam in specified number of ends
and length for weaving and to add the sizer on the warps in order to make
the warps smooth and strong for easy weaving.

Reeding (Reed drawing):- This is a process of winding the yarn on the shuttle bobbin
by automatic winder.

Weaving: - The yarns are arranged according to weft counts and woven by a weaving
machine with the warp separately supplied. The woolen fabrics are taken
up onto wooden rolls.

Shearing: - This is the process of removing the un required parts of the woolen fabric
by using the shearing machine.

Inspection: - The product is made to pass onto inspection machine for quality checkup.

Folding: - The inspected woven wool fabric is then folded onto a roll made of wood or
hard rolled paper.

Packing:- The product is then packed and passed on to finished product store.

Woolen fabric production might produce wastes. However, the wastes can be re-
processed and be re-used in the production of woolen fabrics. This would make woolen
fabrics production environment friendly.

2. Source of Technology
 37-11

The technology of woolen fabric production from woolen yarn is an age old skill applied
in the Far East, particularly in countries like India, and China. Address of Chinese
Company is as follows:
Shanghai Small Enterprises Trade
Development Service Centre
International Cooperation division
Shanghai 200032
Fax (008621) 642201814

B. ENGINEERING

1. Machinery and Equipment

The machinery and equipment required by the envisaged plant and associated costs are
listed in Table 5.1.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST
 37-12

Sr. Machine / Equipment Qty. Cost in birr (‘000)

No. Description (tonnes) FC LC TC
1 Warping machine 2 80 - 80
2 Sizing machine 2 60 - 60
3 Reeding machine 1 35 - 35
4 Prin winding machine 2 80 - 80
5 Weaving machine 4 600 - 600
6 Shearing machine 1 20 - 20
7 Inspection table 2 10 - 10
8 Folding machine 2 30 - 30
9 Packing machine 1 15 - 15
10 Auxiliaries 50 - 50
Sub-Total - 980 - 980
Bank charges, customs and - 200 200
insurance charges, material handling
and transportation costs
Grand Total 980 200 1180

2. Land, Building and Civil Works

Land area is required for production and administration buildings, utilities and general
purpose space. The total land area required will, therefore, be estimated at 4,000 m 2, of
which 1,500 m2 will be for built-up area. This consists of production hall ( 800 square
meters ) , stores for raw materials and finished products ( 500 square meters) , and offices
and social buildings ( 200 squares meters ) At the rate of Birr 2,300 per m 2, the
investment requirement for buildings will be Birr 3.45 million.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.
 37-13

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m 2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.
 37-14

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 80.04 million of which 10% or Birr 8,304,000 will be paid in advance.
 37-15

The remaining Birr 74.74 million will be paid in equal installments with in 28 years i.e.,
Birr 2,669,143 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

Manpower is required both for administration and production activities, a total of 54

persons is required for the envisaged plant. The manpower requirement along with
monthly and annual salaries is shown in Table 6.1.

B. TRAINING REQUIREMENT

Training is required for machinery operators, quality control workers and technicians for
a period of one month in a textile factory that produces woven cotton fabrics. Cost of
training is estimated at Birr 25,000.
 37-16

Table 6.1
MANPOWER REQUIREMENT AND ANNUAL LABOUR COST (IN BIRR)

Sr. Description Req. Salary Salary

No. No. Monthly Annual
A. Administration
1 Plant manager 1 3,500 42,000
2 Secretary 1 900 10,800
3 Personnel officer 1 1,500 18,000
4 Accountant 1 1,500 18,000
5 Sales man 1 1,500 18,000
6 Stores man 1 700 8,400
7 Clerk 2 1,000 12,000
8 General services 6 2,100 25,200
Sub-total 14 152,400
B. Production
1 Production supervisor 1 1,200 14,400
2 Forman 2 1,600 19,200
3 Operator 24 14,400 172,800
4 Laborer 8 2,800 33,600
5 Quality control 2 1,800 21,600
6 Technician 3 2,700 32,400
Sub-Total 40 294,000
Workers benefit (25% of BS) 111,600
Total Cost 54 558,000
 37-17

VII. FINANCIAL ANALYSIS

The financial analysis of the woolen fabrics project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 3% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
17.59 million, of which 6 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 37-18

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 8,304.00 - 8,304.00
2 Building and Civil Work 3,450.00 - 3,450.00
3 Plant Machinery and Equipment 200.00 980.00 1,180.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 865.78 - 865.78
7 Working Capital 3,241.99 - 3,241.99
Total Investment Cost 16,611.77 980.00 17,591.77

* N.B Pre-production expenditure includes interest during construction ( Birr 715.78

thousand, training (Birr 25 thousand ) and Birr 125 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 17.55
million (see Table 7.2). The raw material cost accounts for 86.61 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and utilities which account for 4.76 %, 3.56% and 2.29 % respectively.
The remaining 2.98 % is the share of direct labour, repair and maintenance, labour
overhead and other administration cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
15,170.00 86.41
Utilities 402.25 2.29
Maintenance and repair
59.00 0.34
Labour direct 222.67 1.27
Labour overheads
92.78 0.53
Administration Costs 148.44 0.85
Land lease cost
- -
Total Operating Costs 16,095.14 91.68
Depreciation 835.70 4.76
Cost of Finance 625.19 3.56
Total Production Cost
17,556.03 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 3.08 million to Birr
4.39 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 58.58 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
 37-20

dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 16 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
 37-21

in a bank account. Accordingly, the IRR of this porject is computed to be 25.52 %

indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 14 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 54 persons. In addition to supply of the domestic
needs, the project will generate Birr 5.8 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. Moreover, there is a considerable export potential.