174.

PROFILE ON PRODUCTION OF SPADES AND SHOVELS

174-2 TABLE OF CONTENTS

PAGE

I.

SUMMARY

174-3

II.

PRODUCT DESCRIPTION & APPLICATION

174-3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

174-4 174-4 174-6

IV.

MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

174-7 174-7 174-7

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

174-8 174-8 174-9

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

174-11 174-11 174-12

VII.

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

174-12 174-12 174-13 174-14 174-15

174-3

I.

SUMMARY

This profile envisages the establishment of a plant for the production of spades and shovels with a capacity of 1,200 tonnes per annum.

The present demand for the proposed product is estimated at 774 tonnes per annum. The demand is expected to reach at 1,671 tonnes by the year 2017.

The plant will create employment opportunities for 56 persons.

The total investment requirement is estimated at Birr 1.84 million is required for plant and machinery.

5.39 million, out of which Birr

The project is financially viable with an internal rate of return (IRR) of 27 % and a net present value (NPV) of Birr 4.16 million, discounted at 8.5%.

II.

PRODUCT DESCRIPTION AND APPLICATION

A spade is a tool designed primarily for the purpose of digging or removing earth. In gardening, a spade is a hand tool used to dig or loosen ground, or break up clumps in the soil. Spades are made in many shapes and sizes, for a variety of different functions and jobs. There are many different designs used in spade manufacturing. The most common spade is a garden spade, which typically has a long handle, is wide, and is treaded (has rest of the feet to drive the spade in to the ground).

A shovel is a tool for lifting and moving loose material such as coal, gravel, snow, soil, or sand. It is usually a hand tool consisting of a broad blade with edges or sides that is fixed to a medium-length handle. The term shovel is also applied to larger excavating machines, such as steam shovels, which are designed for the same purpose-lifting and moving materials.

174-4 Generally, both spade and shovel have similar applications such as clearing irrigation ditches, transferring sandy, light to heavy soil and materials, creating defined borders along gardens, walks and drives in all soil types and digging holes to plant flowers and seeds.

III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

A spade is a broad flat blade with a sharp lower age hand tool used to dig or loosen the ground or removing earth. Spades are made from many shapes and sizes for a variety of different functions and jobs. The most common type of spade is the garden spade which has a long handle, is wide and is treaded. loose material like sand, soil gravel, etc. A shovel is similar hand tool used to move

The supply of spades and shovels is met through both domestic supply and import. The stagnant nature of most manufacturing enterprises in the country in the past and the absence of investment in new technology encouraged imported products to dominate the market in shovels and spades. Imported shovels and spades are presented in Table 3.1. Kotebe Hand Tools Factory is the leading domestic producer and according to dealers of the product the domestic supply covers about 15% of the total supply. The average import of shovels and spades in the last ten years was 353 tonnes, the first six years average being 183 and the latest four years average being 609 tonnes. As can be seen from the table, imported supply stepped up in the last four years.

The current effective demand is therefore estimated based on the last four years average and an annual growth rate of 8% which was achieved in 2005/6. Thus, the current

174-5 effective demand for spades and shovels is estimated at 774 tonnes of which 658 tons is imported shovels and spades.

Table 3.1 IMPORTED SPADES AND SHOVELS (TONNES)

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Import 155.3 87.1 200.6 165.2 214.6 277.5 406.3 870.0 558.2 600.5

Source: Customs Authority.

2.

Projected Demand

The demand for spades and shovels increases with agricultural, construction and gardening practices. The demand in the next ten years is estimated based on 2005-6 annual growth rate of imported spades and shovels. Accordingly, the demand is expected to reach at 1,671 tonnes by the year 2017. Projected demand is presented in Table 3.2.

174-6 Table 3.2 PROJECTED DEMAND FOR SHOVELS AND SPADES (TONNES)

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Projected Demand 836 903 975 1,053 1,137 1,228 1,326 1,433 1,547 1,671

3.

Pricing and Distribution

The retail price of a Chinese shovel is Birr 15. The recommended price for the new project is Birr 10. The product will find its outlet through the existing wholesale channel.

B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

According to the market study above, the envisaged plant will have a capacity of 1,200 tonnes of spade and shovels per year. The plant will operate single shift of eight hours a day and 300 days per annum.

174-7 2. Production Programme

The plant is intended starting production at 70% of installed capacity in the first year. It will then raise its capacity to 85% in the second year, and finally to 100% in year three and thereafter.

IV.

MATERIALS AND INPUT

A.

RAW AND AUXILIARY MATERIALS

The raw material required by the plant for the manufacture of spade and shovel is steel plate.

Annual requirement of raw and auxiliary materials is shown in Table 4.1.

Table 4.1 RAW AND AUXILIARY MATERIALS REQUIREMENT AT FULL CAPACITY OPERATIONS

Sr. No. 2 3

Description

Qty. (tones) 1,320 L.S

Unit cost ('000 Birr) 4.23 FC

Total cost ('000 Birr) LC 1,116.72 375.00 1,491.72 Total 6,700.32 375.00 7,075.32

Medium Steel Plate 3-10mm Miscellaneous materials Total

5,583.60 5,583.60

B.

UTILITIES

Inputs required by the plant consist of electricity, water and oil. Electricity is required for supplying power to all production equipment, and also to power sockets, lighting system and other auxiliary equipment of the plant.

174-8 For the plant operating single shift of eight hours a day, and 300 days a year, the total annual electrical energy requirement will be 175,000 kWhs. The annual electricity bill will then be Birr 82,880.

Water is required for cleaning, drinking and general purpose.

The annual water

requirement is estimated at 1,000m3, and oil is used for hardening of the tip of the shovel (quenching), the annual requirement for oil is 1m3 and the corresponding expenditure is Birr 10,000 and birr 7,200, respectively.-.

Thus, the total annual cost of utilities is estimated at about Birr 100,080.

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Process Description

The manufacturing process for the production of spades and shovels comprises design the shape and blanking the steel plate to the desired shape. A shovel often has a very wide sidles blade that curves upward attached to a long, straight handle. It is designed as much for pushing the soil as for lifting it. A spade is designed primarily for breaking up (spading) clumps of soil with foot. Spade blades usually have rounded face without sharply upturned sides.

The highest quality spade and shovel blade is made by heating the blanked plate of steel and hammering it into a form that provided a blade appropriately thin, and as the blade progressed back towards the handle, it could be made thicker to give the blade the amount of stiffness and strength required in the use of the spade and shovel.

Further, to economize on the manufacturing operation, the original blank of the stamped blade includes a projection which when rolled into a circle provides a socket for the spade and shovel handle.

174-9 Originally, emanating from the center of the back or rear edge of the shovel blade, is a tang (as opposed to a socket) similar to the tangs commonly used today in rakes and hoes.

2.

Source of Technology

The machinery and equipment required can be obtained from the following companies. SHANDONG WEICHAI IMP.& EXP.CORP. NO.6A,SIPING Rd.,KUIWEN DISTRICT, WEIFANG, SHANDONG, P.R. OF CHINA Tel +8269988 Fax: +86-536-8232079/8262666

B.

ENGINEERING

1.

Machinery and Equipment

Plant machinery and equipment required for spade and shovel plant is presented in table 5.1. The total investment cost of plant machinery and equipment is estimated at Birr1.85 million.

174-10 Table 5.1 LIST OF MACHINERY AND EQUIPMENT FOR OIL PRESSING MACHINE PLANT

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Cost (Birr)000 Description Heavy duty lathe 7 Lathe machine 8 Shaping machine 24 Heavy duty lathe 5 Electric grinder 8 Pillar drill Pillar drill 1 Slotting machine 7 Welding machine Hack saw machine Hand drill Vice Furnace Tools, gauges, jigs & fitures Total Qty. LC 1 1 1 1 3 2 1 2 3 2 2 4 1 L.S 308.276 45.643 38.036 35.500 25.357 7.608 10.143 12.679 25.357 15.214 10.000 5.071 8.918 68.750 FC 228.214 190.179 177.500 126.786 38.034 50.714 63.393 126.786 76.071 50.000 25.357 35.670 275.00 75.000 1,538.707 Total 273.857 228.215 213.00 152.143 45.642 60.857 76.072 152.143 91.285 60.000 30.428 44.588 343.75 75.000 1,846.98

2.

Land, Building and Civil Works

The envisaged plant will require a total land area of 1,000m2. The total land lease value for 80 years at the rate of Birr 0.40 per m2 is therefore Birr 32,000. The floor space required for the building of and other facilities will be about 750m2. The total estimated cost of building and civil works at the rate of Birr 2,000 per m2 is about Birr 1.5 million.

Therefore, the total cost of land, building and civil works is estimated at Birr 1,532,000.

174-11 3. Proposed Location

Location of an industrial plant is determined on the basis of the proximity to the market for final products. The plant is proposed to locate at Yirga Chefe Woreda in Yirga Chefe town. This is advantageous since infrastructures like electricity, water; transportation and communication are available.

VI.

MANPOWER & TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The manpower list and the corresponding monthly and annual salaries are given in Table 6.1 below. Table 6.1 MANPOWER REQUIREMENT AND ANNUAL SALARY COST Sr. No. Description Req. No. 1 1 1 1 1 1 1 1 3 11 1 17 10 2 6 45 56 Salary (Birr) Monthly Annual 2,000 1,600 1,600 850 1,000 800 600 650 250 24,000 19,200 19,200 10,200 12,000 9,600 7,200 7,800 9,000 118,200 14,400 132,000 54,000 19,200 18,000 237,600 88,950 444,750

A. Administration 1 Plant Manager Head, Finance & Administration 2 Department Head, Production and Technical 3 Department 4 Secretary 5 Accountant 6 Salesman 7 Clerk 8 Cashier 9 General Service Sub-Total B. Production 13 Forman 14 Machinery Operators 15 Assistant Operators 15 Mechanics 17 Laborers Sub-Total Employee's Benefit (25% Of Basic Salary) Total

1,200 650 450 800 250

174-12 B. TRAINING REQUIREMENT

The machine operators and mechanics need at least two weeks training on the technology and maintenance. For the rest, on-the-job training will be sufficient on the start up period by the specialists. Total training cost is estimated at Birr 35,000.

VII.

FINANCIAL ANALYSIS

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

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Raw material, import Work in progress Finished products Cash in hand Accounts payable

5 years 8% 8.5% 30 days 30 days 90 days 2 days 30 days 5 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 5.39 million, of which 41 per cent will be required in foreign currency.

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

174-13

Table 7.1 INITIAL INVESTMENT COST

Sr. No. 1 2 3 4 5 6 7 Cost Items Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost Foreign Share

Total Cost (000 Birr) 32.0 1,500.0 1,847.0 100.0 200.0 390.9 1,329.4 5,399.2 41

* N.B Pre-production expenditure includes interest during construction ( Birr 240.90 thousand ) training (Birr 35 thousand ) and Birr 115 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 8.40 million (see Table 7.2). The material and utility cost accounts for 85.37 per cent, while repair and maintenance take 0.89 per cent of the production cost.

174-14 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads Administration Costs Total Operating Costs Depreciation Cost of Finance Total Production Cost

Cost 7,075.32 100.08 75 266.85 88.95 266.85 7,873.05 339.7 192.19 8,404.94

% 84.18 1.19 0.89 3.17 1.06 3.17 93.67 4.04 2.29 100

C.

FINANCIAL EVALUATION

1.

Profitability

According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity (Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

174-15 2. Break-even Analysis

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 Sales Variable Cost

40 %

3.

Pay Back Period

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 4 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 27 % and the net present value at 8.5% discount rate is Birr 4.16 million.

D.

ECONOMIC BENEFITS

The project can create employment for 56 persons.

In addition to supply of the

domestic needs, the project will generate Birr 2.82 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.