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1 CHAPTER ONE - EXECUTIVE SUMMARY 1.1 MARKET STUDY 1.1.1 Analysis Of The Market Structure The Ethiopian markets for vehicles, the market is served through both import and local production/ assembly. Mesfin Industrial Engineering, AMCE, Maru and Holland Cars PLS are the local companies engaged in the assembling and marketing of vehicles. Mesfin Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS assemble small automobiles. Supply through import consists of a number of importers and small intermediaries that are either involved in direct importation of small consignments mainly second hand vehicles.
On the demand side, the target markets for vehicles include mainly individuals, government and non government institution such as NGOs, international institutes ( ECA, AU etc) and diplomatic missions.
The total number of vehicles in the country excluding military and police vehicles in 1997 was only 69,719. This number has grown to 126,060 in 2005 with vehicle ownership; at on average about one vehicle for 555 persons. During the period 1997 2005 the number of operational vehicles has registered an average annual growth rate of 7.78%.
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b) Supply Analysis The local market for vehicles is met from both local production and imports. Currently, the local producers/ assemblers of vehicles are Mesfin Industrial Engineering MIE) , Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal Industery (MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and assemble small automobiles. The combined local vehicle assembling capacity is about 5,710 of which the grate majority ( 3,960 or 69.35%) is accounted by trucks and trailers the remaining 30.65% is accounted by small automobiles. However, there is no local plant which assembles station wagons and pick ups. The major source of vehicle to the local market is import. The major importers are MOINCO, Nyala Motors, Ethionipon and Equatorial Business Group. During the period 2000-2006, the maximum import was 14,454 (year 2006), while the minimum 9,102 was registered in year 2000. In the remaining years, import was fluctuating between these two extremes, around a mean figure of 11,094 units. Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
Import of pickups and station wagons during the period 2000 2006 has shown a considerable growth, increasing from 1,365 units in year 2000 to a peak of 2,168 units in year 2006, increasing by an annual average growth rate of 11.12 % during the period under review, with average annual import of about 1,664 units. c) Present Effective Demand
The current demand for pickup and station wagon is estimated using four approaches, i.e., single exponential smoothing, double exponential smoothing (one parameter), Holtes two - parameter double exponential smoothing and time trend extrapolation.
However, the time trend extrapolation method is found to be plausible. Accordingly, the present (2008) demand for the products is estimated at 2,082
1.1.3
DEMAND FORECASTING
The future demand for vehicle is influenced by factors such as income, population growth and economic development. Thus, to project the future demand for the product among different projection techniques that consider the most influential factors on vehicle demand were used. Accordingly, trend extrapolation method and growth rate method were used to project the demand.
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1.1.4
Assuming that the envisaged factory will produce quality products that compete with imported ones, under take well coordinated marketing efforts and be price competitive with import, it is assumed that the envisaged assembly plant will capture about 15% market share initially and as awareness increase and promotion activates are carried out the market share will increase to 20 % in the second year. In the third year and than after market share is assumed to be constant at 25 %.
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1.1.5
MARKETING
After assessing alternative distribution channels the producer agent consumer channel in combination of direct supply to consumers is recommended.
The recommended price is Birr 252,726 for station wagons and Birr 215,569 for pickups.
As a new entrant to the market, it is recommended that the envisaged assembly plant advertise its products aggressively.
1.2
The supplier of parts to the project has recommend semi knockdown (SKD) parts assembly process . However, any vehicle assembly plant in Ethiopia has to acquire an investment license from the Ethiopian investment authority and registered as an assembly plant to get a tax privilege, which reduce taxes from 244% to 5% with 15% VAT and 3% with holding tax. Moreover, the regulation of Ethiopian Customs Authority indicates that in order to get the tax privilege the assembly plant has to make a 30% value addition locally. The authorities will assign an auditor by the end of each product to investigate weather the value addition of the assembly plant is in reality not less than 30% of the total production cost to be entitled the tax privilege. SKD parts assembly do not permit the obligatory 30% local value addition as the parts in SKD state are almost at final level including painting. Therefore, if the envisaged
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
Moreover, based on the recommendation of the market study from the total annual production the share of pickups and station wagon is considered to be 60% and 40% respectively. Therefore, the annual assembling capacity of the envisaged plant at full capacity operation is selected to be 329 pickups and 219 station wagons 1.3 MATERIALS AND INPUTS The components required to assemble in CKD-2 condition have to be imported.
However, finishing and auxiliary materials such as paints, lubricants and tires will be obtained locally. The total cost of raw material at full capacity operation is estimated at Birr 105,224,176. The utilities required by the project consist of electricity and water the total annual cost of which is estimated at Birr 540,000. 1.4 TECHNOLOGY AND ENGINEERING
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Abay Trading and Technical S.C is engaged in provision of vehicle maintenance service. As a result the Company possesses most of the machinery and equipment required by the envisaged assembly plant. The company has got enough electrical power and municipality water connection for the envisaged assembly. Moreover, the company also have water well in its compound.
The existing building of Abay Trading and Technical S.C can properly accommodate the machinery and equipment, raw materials, and the intermediate and finished products of the envisaged assembly plant with minor modification.
The additional machinery and equipment required comprise power tools, crane and hoists and testing equipment. The total cost of the additional machinery and equipment required is estimated at Birr 2,977,444. The machinery and equipment for the envisaged assembly plant do not require any additional building. However, installing additional equipment such as cranes and rearranging the existing machineries according to the proposed plant lay out requires civil works. For rearranging the machinery lay out, the floor area, after the removal of the machineries, has to be covered with smooth cement screed having a thickness of 5 cm. Moreover, construction of fences, show room , minor repair on the asphalt road and painting of walls and steel structure will be carried out. Accordingly, the total cost of the civil works is estimated at Birr 250,000.
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1.5 1.5.1
The proposed organizational structure of the envisaged assembly plant comprises the following departments. 1.5.2 Manpower and administration department, Technical and production department, Finance department, and Commercial Department. MANPOWER REQUIREMENT
Considering the productivity level of the local works around 77 workers and management staff are required for the smooth and efficient operation of the envisaged assembly plant in full capacity operation. 1.6 FINANCIAL ANALYSES
The financial implications of the results of the market and technical studies are analyzed under two scenarios. The first scenario assumes that the investment requirement for acquiring Abay Trade and Technical SC will be covered by equity capital and the additional investment requirement will be covered through bank loan . Under the second scenario, it is assumed that the total financial requirement i.e. investment requirement for
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Scenario I Items Investment Cost Production cost at full capacity operation ( Year 4) Cumulated cash flow ( year 11) Net profit ( Year 4) NPV IRR Pay back period Break even at full capacity operation ( Year 4) 42,500,060.00
Scenario II 43,882,690.00
36%
38%
As can be seen from the above Table the investment cost required in scenario one ( assuming investment requirement for acquiring Abay Trade and Technical SC will be covered by equity capital and the additional investment requirement will be covered
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
After the assessment of the market condition the local management capability and productivity level of work force, rules and regulation of the country and other relevant external environments the following conclusion are forwarded. CKD-2 parts assembly plant could be ideal solution to meet the requirement of Ethiopian customs Authority to be entitled to the tax privilege; There should be a FOB price difference between fully assembled automobile, SKD,CKD-1 and CKD-2 parts The productivity and quality of local labor force need to be address to get the intended result; Flexible automotive assembly plant is needed to give a room to adjust production output according to the market condition;
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The study reveals that attractive interior and exterior design, availability of safety measures like air bags, availability of central locking system and good quality stereo, availability and cost of spare part and fuel efficiency are critical factors considered while choosing vehicles. Therefore, the above attributes should be given top priority by the envisaged plant Besides, quality control should also be given top precedence so that the envisaged assembly plant could achieve its aims through producing top quality products that can compete with imported vehicles in all aspects. .
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B. H. Trading and Manufacturing P. L. C. was established in 1996 E. C. with a capital of Birr 1.3 million with the objective of producing crushed aggregate to be supplied to local contractors for the construction of major road projects, concrete works, etc. In 2004, the Company underwent major expansion to establish a fully automated concrete block manufacturing plant with a capacity of 17,000 pieces of hollow blocks per one shift of 8 hours. Currently, the Company has a paid up capital of Birr 7 million and an investment of over 25 million Birr. B. H. Trading and Manufacturing P. L. C. is currently the sole agent and distributor of large scale Chinese state owned and private manufacturers of automobiles, heavy duty trucks, and construction machinery. The Company has a signed agreement with Great Wall Motors, which is the biggest private owned SUV, pickups, and passengers car manufacturer in China, SinoTruck, the biggest heavy duty manufacturer in China, and Xiang Construction Mchinery, one of the leading state owned construction machinery suppliers in China.
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
The main objective of the study is to investing, whether the envisaged assembly plant is financially viable or not. 2.3 STUDY METROLOGY
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The study has relied on both primary and secondary data, which involved both desk and field works. Secondary data such as the historical local production (assembly) and import of vehicles and other pertinent data was collected from Central Statistics Authority (CSA), Customs Authority, Road Transport Authority, and other relevant sources and is analyzed objectively to identify major marketing variables such as the supply and demand trends, apparent consumption of the product, etc. The field research, on the other hand, involves the collection and compilation of market related information which is more of qualitative nature from users and intermediaries (distributors and retailers). Accordingly primary, data regarding the following issues is collected. Price of brand new and second hand vehicles by origin, type and at various distribution level, Existing distribution setup, Desired features, Constraints faced in marketing the products etc.
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Automobile, self-propelled vehicle used primarily on public roads but adaptable to other surfaces. Automobiles changed the world during the 20th century, particularly in the United States and other industrialized nations. From the growth of suburbs to the development of elaborate road and highway systems, the so-called horseless carriage has forever altered the modern landscape. The manufacture, sale, and servicing of automobiles have become key elements of industrial economies. Automobiles are powered and controlled by a complicated interrelationship between several systems. The major systems of the automobile are the power plant, the power train, the running gear, and the control system. Each of these major categories include a number of subsystems. The power plant includes the engine, fuel, electrical, exhaust, lubrication, and coolant systems. The power train includes the transmission and drive systems, including the clutch, differential, and drive shaft. Suspension, stabilizers, wheels, and tires are all part of the running gear, or support system. Steering and brake systems are the major components of the control system, by which the driver directs the car.
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Table 3.1 SPECIFICATION OF PICKUPS THAT WILL BE ASSEMBLED BY THE ENVISAGED PLANT Model Type Vehicle curb weight (kg) Max. total mass (kg) Load weight (kg) Front (kg) no rear load (kg) Front (kg) Axle Load Full Rear distribution load (kg) Length (mm) Width (mm) Overall dimension Height (mm) Wheel base (mm) Wheel track Front (mm) axle 890 axle 770 axle 960 axle 1,505 5,040 1,800 1,730 3,050 1,515 1,485 5,040 1,720 1,675 3,050 1,460 1,535 5,040 1,800 1,730 3,050 1,515 1,485 5,040 1,720 1,675 3,050 1,460 940 1,050 1,020 750 800 750 870 980 950 CC1021PS05 4X2 1,660 2,465 480 CC1021PS06 4X2 1,620 2,425 480 CC1031PS25 4X4 1,780 2,585 480 CC1031PS41 4X2 1,700 2,505 480
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Table 3.2 SPECIFICATION OF STATION WAGONS THAT WILL BE ASSEMBLED BY THE ENVISAGED PLANT Model Engine Power(kw) Gasoline Mitsubishi4G64 16V 4 cylinder in line 93/5250 100/5250 Diesel GW2.8TC 70/3600 225/16002600 4X2/4X4 2.8L GW2.8TCI 85/3400 285/18002600
Torque(N.m) 195/2500 200/2500-3000 Type of drive 4X2/4X4 Displacement(L) 2.4L Dimension(L x W x H) (mm) 4620X1800X1710 Compressive ratio 9.5:1 9.8:1 17.2:1 Transmission box 5-gear manual transmission Steering gear system Gear rack integral Power steering Front suspension Double fork-arms type, independent suspension with torsion bar springs Rear suspension 4-link coil spring dependent suspension Two-circuit hydro-vacuum brake, front Brake system and rear disc brake Min.ground clearance(mm) 200 180/175 200 180/175 Max.grade ability not less 0.35
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3.2
On assuming power in mid-1991, the Ethiopian Peoples Revolutionary Democratic Front (EPRDF) led Transitional Government of Ethiopia (TGE) has committed to introduce a market economy in the country whereby the private sector would be the driving force in the development of the economy. To this end, the government has pursued a step-by-step approach to abolish most of previous legislations restricting market forces and private enterprise flourishing. Accordingly, a range of policy measures and reforms has been undertaken. The reforms include among others are the following measures; The complete liberalization of prices, The devaluation of the national currency (Birr), The enactment of a new more liberal investment law for the promotion and encouragement of private investment both foreign and local, The granting of autonomy to public enterprises and undertaking of privatization program, Establishment of a more market determined foreign exchange and interest rates, Liberalization of foreign trade, Abolishing of all export taxes (except on coffee), and Reduction of inflation through budgetary and monetary controls, Moreover, in recognition of the significant role private capital plays in the development of an economy, the Government of Ethiopia has eliminated discriminatory tax and credit
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Each of the proclamations has specific features that are either expanded or improved by the latter versions. The above proclamations and accompanying regulation determine the size of initial investment and areas of investment, areas reserved for domestic investors, and provide an array of incentives. In addition to the generous incentive the following guarantees are provided to investors - Repatriation of capital and profits Capital repatriation and remittance of dividends and interests is guaranteed to foreign investors under the investment proclamation. Any foreign investor has the right, in respect of an approved investment, to make the following remittances out of Ethiopia in convertible currency at the prevailing exchange rate on the date of remittance: profits and dividends accruing from an investment, principal and interest payments on external loans, payments related to technology transfer or management agreements, proceeds from sales
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- Guarantee against Expropriation The constitution of the Federal Democratic Republic of Ethiopia protects private property. The investment proclamation also provides investment guarantee against measures of expropriation and nationalization that may only occur for public interest and in compliance with the requirements of the law. Where such expropriations are made, the government guarantees to provide adequate compensation corresponding to the market value of property and such payments shall be effected promptly.
- Other Guarantees Ethiopia is a member of the World Bank- affiliated Multilateral Investment Guarantee Agency (MIGA) which issues guarantee against non commercial risks to enterprises that invests in signatory countries. Ethiopia is currently concluding bilateral investment promotion and protection agreements with a number of developed and developing countries and it is ready to conclude such treaties with any country at any time. Ethiopia has also signed the World Bank treaty, the International Convention on settlement of investment disputes between states and Nationals of other States (ICSID). Moreover, Ethiopia has a significant export potential of electric wires and cables to neighboring countries and the Meddle East. Therefore, the governments policy and
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Foreign exchange surrender requirement on exporters was replaced by permitting them to sell their foreign exchange receipts at freely negotiated rate to Banks or permitting the use of foreign exchange proceeds for current account transaction within four weeks. Exporters were also allowed to hold 10% of their foreign exchange earnings indefinitely. Furthermore, the government support investment by facilitating access to credit, access to land and through dialogue with sub sector representatives by which sector issues discussed and obstacles are removed. - Capital Requirement for foreign Investors USD 100,000 for a single and wholly foreign owned investment in cash and/ or in kind USD 60,000 on cash and/ or in kind per project if the investment is made in partnership with domestic investors
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Therefore, it can be concluded that currently in Ethiopia there is a conducive business environment.
3.3
A market structure refers to the number and characteristics of the firms operate in it. Many industries or markets are dominated by a few firms while others contain many sellers. In some markets, products are homogeneous where sellers can meet the needs of consumers equally well. In other markets, products are heterogeneous that different customers may have preferences for different sellers.
Four basic types of market structure are monopoly, monopolistic competition, oligopoly and perfect competition. Table 3.3 summaries the characteristic of each market structure.
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Monopoly Monopolistic Competition Many Many buyers; buyers; small relative small to the market relative to the market
Oligopoly
Perfect Competition Many Many buyers; buyers; small small relative to relative to the market the market
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
In the case of the Ethiopian markets for vehicles, the market is served through both import and local production/ assembly. Mesfin Industrial Engineering, AMCE, Maru and Holland Cars PLS are the local companies engaged in the assembling and marketing of vehicles. Mesfin Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS assemble small automobiles. Supply through import consists of a number of importers and small intermediaries that are either involved in direct importation of small consignments mainly second hand vehicles.
On the demand side, the target markets for vehicles include mainly individuals and government and non government institution such as NGOs, international institutes ( ECA, AU etc) and diplomatic missions. The whole market setup including the major actors is depicted schematically in Figure 3.1. Figure 3. 1 THE ETHIOPIAN MARKET STRUCTURE FOR VEHICLES
Supply Side
Demand Side
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Individuals
Local Assemblers
As can be realized from the above discussion, there are three local producer/ assemblers of vehicles on the supply side. However, there is a large number of importers, while regarding demand side, the final consumers are numerous and scattered in different geographical areas of the country. Moreover, there is no visible entry barrier.
Therefore, the market structure for vehicles is characterized by multiple suppliers both local and foreign origin. Therefore, there is a strong and fierce competition between
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
The total number of vehicles in the country excluding military and police vehicles in 1997 was only 69,719. This number has grown to 126,060 in 2005 with vehicle ownership; at on average about one vehicle for 555 persons. During the period 1997 2005 the number of operational vehicles has registered an average annual growth rate of 7.78%. ( See Table 3.4 ). However, despite the high growth rate t he proportion of motor vehicles to the population of the country is extremely low compared to other African countries. According to different sources, the number of vehicles per 1000 people is only 2.2, where as, in Kenya 13, in Namibia 85 vehicles per 1000 persons and in South Africa the figure reached 143.
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During the period under consideration overall vehicle population has registered an average annual growth rate of 7.8%. However, when type of vehicles are individually considered the growth rate ranges from 5.72% for private cares to 21.64% for truck tractors. ( See Table 3.6 ) Table 3.6 AVERAGE GROWTH RATE OF REGISTERED VEHICLE POPULATION BY TYPE Average Type Private cars Station wagon Taxi less than 5 seats Taxi 5 - 12 seats Bus less than 30 seats Bus above 30 seats Pick up and trucks ( up to 70 quint.) Trucks ( 71 to 180 quint.) Trailer Truck tractor Semi trailer Tanker Sub Total Motor cycles and special machinery Grand Total Growth rate 5.72 3.13 16.61 10.49 8.78 19.73 13.17 11.52 12.50 21.64 18.41 11.51 7.80 9.89 7.80
The existing vehicle fleet is composed of old cars. As can be seen from Table 3.7 of the total vehicle fleet the age of 28.1% is above 25, 17% between 21 and 25 and 11.4% between 16 and 20 which indicates most of the existing vehicles ought to have been
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
The local market for vehicles is met from both local production and imports. Details of the supply from both sources are discussed as follows. a) Local Production
Currently, the local producers/ assemblers of vehicles are Mesfin Industrial Engineering MIE) , Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal Industery (MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS assemble small automobiles. Maru Metal Industry (MMI) was established in 1975 . MMI started its business by manufacturing metal doors, windows, fences and beds. Later shifted to constructing trusses, silos, mobile houses, etc. After developing its engineering capability and gathering enough experience on the field it moved in the production of more
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Assembling of commercial vehicles including buses of IVECO range Manufacturing of bus bodies Sale and trade of IVECO products manufactured by the Company or imported built- up Import and distribution of original IVECO spare parts Assuring a proper after sale service, according to IVECO standard
Mesfin Industrial Engineering ( MIE) was founded in 1992. It is located 780 kms-North from the capital city Addis Ababa, at Mekelle in Tigray region. The company is engaged in the production of metal equipment and components for energy, mining, construction, transport, agricultural and other related sectors. With an annual assembling capacity of 3,000 trailers and semi-trailers, MIE is the biggest trailer manufacturer in East Africa. It designs and manufactures vehicle bodies, trailers, as well as high & low-bed semitrailers. MIE's product range includes inter-city and city buses, skip-loaders, and waste and sewer cleaners for the municipal services.
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Accordingly, the combined local vehicle assembling capacity is about 5,710 of which the grate majority ( 3,960 or 69.35%) is accounted by trucks and trailers the remaining 30.65% is accounted by small automobiles. However, there is no local plant which assembles station wagons and pick ups. b) Import The major source of vehicle to the local market is import. The major importers are MOINCO, Nyala Motors, Ethionipon and Equatorial Business Group.
The External Trade Statistics of the Ethiopian Customs Authority categorizes import of vehicles under the following headings: Public transport vehicles seat capacity < 15 passengers Public transport vehicles seat capacity >= 15 passengers Vehicles with cylinder capacity of < 1000 CC
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The import data of Ethiopian Customs Authority has a limitation on specific products due to its aggregate nature.
The quantity of vehicles annually imported during the period 2000 2006 is shown in Table 3.8. During the period 2000-2006, the maximum import was 14,454 (year 2006), while the minimum 9,102 was registered in year 2000. In the remaining years, import was fluctuating between these two extremes, around a mean figure of 11,094 units.
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Year 2000 2001 2002 2003 2004 2005 2006 Average % share
Public transport vehicles seat capacity < 15 passengers 1,951 1851 2,046 1,957 1,744 1214 2,878 1,949 17.56
Public transport vehicles seat capacity >= 15 passengers 402 483 214 510 456 206 221 356 3.21
Vehicles with cylinder capacity of < 1000 CC 126 108.5 193 75 142 133 253 147 1.33
Goods Vehicle s 2,009 1833.5 2,354 2,840 2,827 3614 3,094 2,653 23.91
Total 9,102 11,442 9,078 11,785 12,099 9,702 14,454 11,094 100
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Import of vehicles though characterized by a noticeable growth trend (See Figure 3.2), exhibits fluctuations from year to year. In 2001, total import has increased by about 25.71% as compared to 2000. However, in 2002 import has decreased by 20.66% .In 2003 and 2004 import has increased by 29.82% and 2.66% respectively. However, import has decreased by 19.81% in 2005 compared to import level of 2004. In 2006, import has registered a huge growth, increasing by 48.97 %. On average, during the period under review (2000 2006) import of vehicles has registered an average annual growth rate of 11%.
15,000
14,000 13,000
12,000
Unit
11,000
10,000 9,000
8,000
2000
2001
2002
2003
2004
2005
2006
year
The import data of vehicles does not show import of pickups and station wagons separately. Therefore, in order to estimate annual import of station wagons and pickups it
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Station Total Year Vehicles wagons Pickups 9,102. 2000 0 455 910 11,442. 2001 0 572 1,144 9,078. 2002 0 454 908 11,785. 2003 0 589 1,179 12,099. 2004 0 605 1,210 9,702. 2005 0 485 970
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As it can be seen from Table 3.9, import of pickups and station wagons during the period 2000 2006 has shown a considerable growth, increasing from 1,365 units in year 2000 to a peak of 2,168 units in year 2006, increasing by an annual average growth rate of 11.12 % during the period under review, with average annual import of about 1,664 units. 3.4.3 PRESENT EFFECTIVE DEMAND
There are two main approaches for estimating the demand for a product. Either the estimate of future value is based on an analysis of factors which are believed to influence future values, the explanatory or end - use method, or else the prediction is based on an inferred study of the behavior of historical supply data and trend over time - the extrapolation method. Both approaches can produce accurate forecasts, but the former method is often more difficult to implement and validate than the latter approach, due to lack of data at the required level.
The extrapolation method does not take into consideration the underlining factors that affect the demand for a product. Instead, in order to infer about its future behavior and trends, past behaviors and trends on time series supply data are scrutinized. The method used to produce a forecast may involve the use of deterministic models such as smoothing and linear extrapolation or the use of a complex stochastic model for adaptive forecasting. Accordingly, in order to estimate the current effective demand for pickup and station wagon in Ethiopia, the following methods were applied: - Single exponential smoothing;
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a)
The single exponential smoothing analysis predicts a value based on the forecast for the prior period, adjusted for the error in that prior forecast. Exponential smoothing technique involves the following equation: Ft+1 = Xt + (1 - ) Ft, where Ft+1 : represents forecast value for one time ahead (current demand for that period), Xt : actual sales volume at time t and : the smoothing constant having a value between 0 and 1. Accordingly, based on the above equation the estimated present effective demand for station wagons and pickups is about 1,716 units (see Table 3.10) Table 3.10 APPLICATION OF THE SINGLE EXPONENTIAL SMOOTHING METHOD ON THE HISTORICAL DATA ( in unit) Year 2000 2001 2002 2003 Supply 1,365 1,716 1,362 1,768 Forecast 1,365 1,435 1,421 1,490
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The double exponential smoothing analysis predicts a value based on the forecast for the single exponential smoothing, adjusted for the error in that prior forecast. Double exponential smoothing technique involves the following equation: St = Xt+ (1-) St-1 St = St+ (1-) St-1 Ft+m = at + btm, Where St is the single exponential smoothed value, St is the double exponential smoothed value, Ft+m = at + btm is the forecasted value one time ahead, at = St + (St- St) , bt = (/1- ) (St- St) m is the number of periods ahead to be forecast Xt actual sales volume at time t and is the smoothing constant having a value of 0.2 . Accordingly, based on the above equation the result arrived is about 1,572 units (see Table 3.11)
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Table 3.11 APPLICATION OF THE DOUBLE EXPONENTIAL SMOOTHING METHOD ON THE HISTORICAL DATA Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 c) Supply 1,365 1,716 1,362 1,768 1,815 1,455 2,168 Forecast 1,365 1,379 1,387 1,408 1,437 1,457 1,498 1,537 1,572
Holts two - parameter double exponential smoothing model is given by: Y t+k = Lt + kTt, Lt = alpha * Yt+ (1-alpha) (Lt-1 + Tt-1), Tt = beta (Lt- Lt-1) + (1-beta) Tt-1, where: Y t+k stands for forecasted value, Lt indicates the long-term level or base value for the time-series data, i.e. the level term, Tt indicates the expected increase or decrease per year, i.e., the trend term, K stands for the number of time periods we want to forecast, t-represents time, and alpha and beta are smoothing parameters.
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Based on the above model, the estimated present demand for station wagons and pickups is shown in Tables 3.12. Table 3.12 DOUBLE EXPONENTIALLY SMOOTHED FORECAST (HOLTS TWO PARAMETER) Alpha Beta = = 0.6 0.4 Tend Term 1,365.00 1,716.00 1,644.00 1,791.12 1,872.62 1,675.39 1,971.41 Level Term 351.00 351.00 181.80 167.93 133.36 1.12 119.08
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
d)
The principle of least squares is employed to fit a linear trend to the historical data of sales (y) and time (t) and the relation is expressed by the following equation: Y = + bt,
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a is the intercept and b is the slope. Accordingly, the following linear equations is developed, y = 1,664 + 41.7857x Based on the above equation the present ( 2008) effective demand for station wagons and pickups is estimated at 2,082 units. e) Evaluation of the Methods Used To Estimate The Present Demand
The result of the various methods used to estimate the present demand is summarized in Table 3.13. Table 3.13 SUMMARY OF ESTIMATED PRESENT EFFECTIVE DEMANED FOR PICKUPS AND STATION WAGONS
Method Single exponential smoothing Double exponential smoothing(one parameter) Holt's two - parameter double exponential smoothing Time trend extrapolation
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In order to select the most appropriate method, the significance of the methods used for short-term forecasting was evaluated by using different testing methods. The results of these test methods are shown in Table 3.14.
Projection Methods
MSE* 5706628071440.4 Single Exponential 3 5317656760710.0 Double Exponential 2 Holt's two - 6872354050807.0 parameter 4
DarbinUWatson MAPE* Statistic Statistic. 75.58 134.15 453.17 0.77 0.96 1.49 0.4 0.78 1.19
* MSE = mean squared error, * MAPE = mean absolute percentage error. The test statistics shown in Table 3.14 shows that there is a high percentage error between the historical data and their forecasts. However, the U-statistic which provides relative comparison of the formal forecasting methods with intuitive methods indicates that the single exponential smoothing and the double exponential smoothing methods are relatively acceptable as they are below unity. But the Darbin Watson statistic shows the error terms between the data series and their estimates do not have a random distribution and the error terms have certain relationships among themselves in all the three cases. This indicates the inappropriateness of these methods.
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(t calculated = (b/se (b)) = 4.03) > (t (8) (=0.01) =2.896) indicates the slope of the relationship line between the data series and the time trend is significantly different from zero. Similarly the intercept of the relationship line is significantly different from zero as (t calculated = \ (a/se (a))\= 56.93) Besides, the r2 value which is 0.7 shows that a high proportion of the data is explained by the time series and this complements with the above tests. Therefore, the time trend extrapolation method is the best fit to estimate the present effective demand for station wagons and pick ups. Accordingly, the present ( 2008) effective demand for the products is estimated at 2,082 units.
3.5
DEMAND FORECASTING
3.5.1 ASSESSMENT OF THE TREND OF MAJOR FACTORS THAT AFFECT DEMAND FOR VEHICLES Knowledge of the determinants of market demand for a product and the nature of the relationship between demand and its determinants is very helpful in analyzing and
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Rate of population growth and urbanization Expansion of road transport infrastructure such as roads Trend in the presence of international institutions, NGOs and diplomatic missions Activities of the federal governments sectoral offices The present governments policy of decentralization
Accordingly, a thorough assessment of current status and future prospect of these factors is conducted hereunder as they have decisive influence on the likely direction of the demand for the products under consideration.
a)
There is a strong relationship between economic development and transport demand. The Ethiopian economy has responded positively to the reform measures and the appropriate sectoral development policies and strategies adopted by the present government. During the period 2001 2006, real GDP and real GDP per capita have grown from Birr 64.34 billion and Birr 985 to Birr 85.15 billion and 1,134 respectively, registering an average annual growth rate of 6.5% in terms of real GDP and 5.28% in terms of real GDP
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Table 3.15 TRENDS IN ETHIOPIAS REAL GDP AND REAL GDP PER CAPITA Growt Real GDP h Real GDP Growth Year ( million Birr) rate Per capita rate 2001 64,343 7.2 985 4.6 2002 64,990 1 967 -1.8 2003 62,844 -3.3 909 6 2004 70,345 11.9 989 8.8 2005 77,730 10.5 1,065 7.6 2006 85,184 9.6 1,134 6.5 Source; National bank of Ethiopia annual Bulletin 2006 Moreover, during 1999 - 2005 export grew by about 5% a year, annual inflation averaged about 4% and by 2005 investment had risen to 16% of GDP. The positive performance of the Ethiopian economy is expected to continue in the future. As a result demand for vehicles economic expansion continues. b) Population Growth And Urbanization may also be reasonably expected to increase as
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According to the second national population and housing census the population of Ethiopia was estimated to be 53,477,265 in October 1994. The census also revealed that 86.3 percent of the population reside in the rural areas, while 13.7 percent were urban dwellers. The country is among the high fertility nations with a total fertility rate of 6.9 children per woman. Over 45 percent of the population are below age 15, indicating that
there is a large potential of women in the childbearing age. Because of this potential population momentum, what ever intervention measures are to be taken to reduce fertility, the growth of the population will show a fast increase for a couple of years to come. In fact, assuming the growth rate will decline from the current 2.9 percent per annum to below 2.0 percent by 2030, the Central Statistical Authority of Ethiopia projected the country's population to be over 106 million by 2020 and nearly 130 million by 2030 (CSA1999). The World Bank projected the country's population to be over 122 million by 2020 and over 158 million by 2030 (WB, 1994/5). This implies that the population will double in less than a quarter of a century and may triple well before 2050 which will create a substantially large market for vehicles. 2. Urbanization Urbanization is a development phenomenon that comes about with the development of a country's economy in general and industrialization in particular. The rate of urbanization is directly related to the demand for houses. It is expected that as a country becomes more urban, more houses will be needed to accommodate the increasing population in urban centers. In 1984 the urban population of Ethiopia contributed only 11.2 percent to the total population of the country (CSA, 1984). Over the ten years between the two census, the proportion grew to 13.7 percent (CSA, 1999).
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c) Investment Activity During 1993 2006 at national level a total of 19,363 investment projects involving Birr 229.28 billion capitals were licensed by the Ethiopian Investment Agency and Regional Investment Offices. (See Table 3.16). Of the total licensed projects, 17,310 (or 89.4 percent) were domestic, 1955 (or 10.1 percent) foreign, and 96 (or 0.5 percent) public. In terms of investment capital Birr 140 billion (or 61.1 percent) were domestic, Birr 63.5 billion (or 27.7 percent) foreign and Birr 25.67 billion (or 11.2 percent) were public. Table 3.16 NUMBER AND INVESTMENT CAPITAL OF TOTAL APPROVED PROJECTS ( CAPITAL IN MILLION BIRR) Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Number 545 526 693 908 795 898 713 624 687 801 Capital 3,983 3,421 5,338 6,490 6,722 9,939 10,060 14,127 8,856 9,190
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Source: Annual Report by the National Bank of Ethiopia During the period of analyses the number and investment capital of approved projects has registered an average annual growth rate of 25% and 32% respectively.
[
As a result of the various incentives provided by the government the high growth rate of investment activity witnessed in Ethiopia during the past few years is expected to continue in the future. Considering the fact that new investment projects will require vehicles for collection and distribution of inputs and products and commercial and administrative activities it can be assumed that the increasing number of investment projects will increase the demand for vehicles. d) Expansion Of Road Transport Infrastructure Such As Road Net Work
Ethiopia is a vast country covering over 1.1 million km 2 .Its population of 67 million is widely dispersed, with 85% living in rural areas and deriving their livelihood from settled peasant agriculture. Road transport is the dominant mode that carries about 95 percent of the countrys passenger and freight traffic and is the only form of access to most rural communities.
However, although road transport is the dominant mode of transport, Ethiopia has a much less developed land transport infrastructure than most African countries, with an estimated 51 km per 1000 sq. km and 0.49 km per 1,000 population in 2007.
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In recognition of lack of road net work the Government of Ethiopia has attached a high priority to the road sector and launched a major 10-year Road Sector Development Program . The program targets construction of almost 20,000 km of new roads by 2010.
e)
As the seat of the Headquarters of the United Nations Economic Commission for Africa (UNECA), the African Union (AU) and other regional and international organizations, Addis Ababa is the diplomatic capital of Africa.
The presence of more than 100 embassies and consular missions has enabled the capital to be a venue of international activities and the fourth most important center of international organizations as well as embassies after Washington D.C., New York and London. NGOs operating in Ethiopia could be categorized into two main categories: Indigenous NGOs, which are Ethiopians or non-Ethiopians. NGOs established in the country by either
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in government in 1990 a more conducive environment was established further encouraging the growth of NGOs in Ethiopia. In 2000 it was reported that around 240 local and international NGOs were registered in Ethiopia. Currently, the number has risen above 485. These organizations are under taking the construction of health centers, schools, potable water supply, irrigations, sanitary facilities and feeder roads. In a country where about 40% of the total population is living below the poverty line, the imitative taken by the development partners are expected to increase and continue for quite some time. Consequently, the demand for vehicles, emanating form the international institutions, diplomatic missions and NGOs is assumed to be potentially high and increases progressively.
d)
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The Ethiopian government committed to the expansion of infrastructure to facilitate economic growth. Moreover, pursuant to the development strategy which gives priority to multi-dimensional rural development effort and commitment to improve social services (education, health, etc), country-wide infrastructural constructions are anticipated to increase at faster pace.
One way of assessing the trend in the activity of government agencies is scrutinizing planned expenditure. Planned budgetary expenditure by the various government agencies is given in Table 3.17
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Year Items Irrigation Education Health Water & sanitation Roads Power Urban development Grand Total 2006 2,150 8,236 4,725 3,816 5,126 9,728 housing 4,850 38,631 4,850 5,834 5,834 55,612 9,334 57,76 3 30,702 249,449 2007 3,785 9,372 5,677 4,174 2008 3,507 11,612 6,872 4,015 2009 5,031 12,620 8,133 1,768 10,907 11,319 2010 6,282 11,90 2 9,473 1,815 11,28 7 7,670 Total 20,755 53,742 34,880 15,588 43,160 50,622
As it can be seen from Table 5.35, budgetary allocation to government agencies has increased from Birr 38.63 billion in year 2006 to Birr 57.76 billion by the year 2010 registering an average annual growth rate of 10.72%. Accordingly, it can be reasonably expected that demand for vehicles expand. by government agencies, which execute the governments development program will exhibit a substantial growth as their operation
e)
The decentralization of governance to woredas assumed the form of devolution, which grants decision making powers to woreda authorities and allows them to take full
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The envisaged goals of devolution of power to the Woredas can be realized only if the capacity of the woredas is upgraded gradually in line with the function they are expected to perform and the corresponding deliverables. Accordingly, one of the requirements is vehicle availability which is a decisive factor for the smooth operation of the woreda sectoral offices. Therefore, it can be concluded that the governments decentralization policy will create a huge demand for vehicles.
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From what was discussed in the preceding sections, it is not difficult to conclude that the demand for station wagons and pickups will grow in the future. The issue, therefore, is how best to estimate the future demand.
The projection methods used for current demand estimation cannot be good to provide a forecast covering a longer period of 10 to 15 years. A number of factors that are taken for granted to be constant under this method will not remain constant over a span of that length. The method properly serves for a shorter period or under a known less variable circumstances.
As discussed earlier there are number of factors that influence the demand direction of the products under consideration singularly or jointly. Some of these factors influence demand negatively and others will make demand to increase linearly or exponentially having different shapes and turning points. Therefore, in order to project the future demand for the products the responsiveness of demand to various factors that influence its movement should be examined and the most relevant projection should be selected.
Therefore, the future demand for pickups and station wagons is estimated using different projection techniques that implicitly or explicitly show the influence of the major factors that have decisive influence on future movement of demand. Accordingly, the following
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This method involves the development of relations between two or more variables. It is expressed like the trend method either in the form of linear or curve linear regression equation. Among the factors that have a strong influence on the demand for pickups and station wagons , income and population growth are identified to have the most profound effect. Therefore, these variables are used to forecast the future demand for the products.
One of the indicators that measure the economic performance of a country and the well being of the population is per capita GDP. Thus, it is assumed that per capita GDP indicates the level of income. Moreover, the urban population is the predominant consumer of the products. Therefore, in estimating the demand for the product only urban population is considered. Accordingly, the data used to develop the regression equation are presented in Table 3.18.
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Table 3.18 HISTORICAL SUPPLY OF STATION WAGON AND PICKUPS, GDP AND URBAN POPULATION
Urban Population (in 000) 10,792. 0 11,105. 0 11,427. 0 11,759. 0 12,172. 0 12,475. 2 12,816. 6
Per capita GDP 848. 0 872. 9 898. 6 925. 3 945. 9 972. 6 997. 5
The regression analysis has revealed that both GDP and size of urban population have strong positive relationship with apparent consumption of vehicles. The relation ship of the above variables has been found to be linear in both cases and is expressed by the following equations.
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Y = 14.59 + 0.139883(x), based on per capita GDP, and. Y = 14.72 + 1.787094 (x), based on urban population.
Using the above equations and assuming that over the forecasting period per capita GDP will continue to grow at an equivalent rate of the average growth rate it registered during the period 2000-2006, which was 5.8% and using CSAs estimation of urban population size, the projected demand for station wagon and pickups has been worked out and presented in Table 3.19. Table 3.19 FORECASTED DEMAND BASED ON REGRESSION METHOD
Per capita GDP Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1,161.18 1,207.63 1,255.93 1,306.17 1,358.42 1,412.75 1,469.26 1,528.03 1,589.15 1,652.72 1,718.83 1,787.58 1,859.09
Projected Demand
Urban Population (In 000) 14,417 14,994 15,593 16,217 16,866 17,540 18,242 18,972 19,731 20,520 21,341 22,194 23,082
Projected Demand
2,126 2,248 2,378 2,515 2,660 2,813 2,976 3,147 3,329 3,521 3,725 3,940 4,167
2,031 2,112 2,196 2,283 2,374 2,468 2,566 2,668 2,775 2,885 3,000 3,119 3,243
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b)
This method considers the influence of major determent factors on the demand for the products under consideration. Factors such as economic performance and population size etc. are expected to have direct influence on demand for vehicles. A growth in one of these indicators would stimulate an increase in the demand for the products. According to the Department of the National Income Accounts of the Ministry of Finance and Economic Development, the GDP of the country exhibited an average annual growth rate of 5.8 % during 2000 - 2006. If GDP continues to grow at this rate over the forecast period, it is most likely that the demand for pickups and station wagons would also increase at a similar rate. Thus demand for pickups and station wagons is projected based on a 5.8% growth rate over the forecast period. A second alternative is also provided assuming that the demand for the products under consideration increases parallel to the growth in urban population . According to CSA the urban population of the country grows at a rate of 4% annually, therefore a similar growth is anticipated in the demand for pickups and station wagons. The third alternative is based on the assumption that the average growth rate registered by the products historical total supply ( apparent consumption) will also continue in the future. Accordingly, the average growth rate exhibited by total supply of pickups and
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Accordingly, based on the above discussed methods and taking the year 2006 total supply ( apparent consumption) as a base the projected demand for the products are given in Table 3.20.
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Table 3.20 PROJECTED DEMAND BASED ON GROWTH RATE METHOD 5.8% 4% growth growth Rate Rate 2,255 2,294 2,345 2,427 2,439 2,568 2,536 2,716 2,638 2,874 2,743 3,041 2,853 3,217 2,967 3,404 3,086 3,601 3,209 3,810 3,338 4,031 3,471 4,265 3,610 4,512 3,754 4,774 3,904 5,051 4,061 5,344 4,223 5,653 11.12% growth Rate 2,409 2,677 2,975 3,305 3,673 4,081 4,535 5,040 5,600 6,223 6,915 7,684 8,538 9,487 10,542 11,715 13,017
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 c)
different alternative methods are shown in Table 3.21. The projections based on the products past growth rate is higher than the other alternatives; while the projection based on regression ( with urban population) is the lowest.
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Table 3.21 SUMMARY OF THE ALTERNATIVE PROJECTION METHODS Growth Rate Method Regression Method Based on Urban population 2,031 2,112 2,196 2,283 2,374 2,468 2,566 2,668 2,775 2,885 3,000 3,119 3,243 3,373 3,507 3,647 3,792
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
4% growth 5.8% growth 11.12% growth Based Rate Rate Rate on GDP 2,255 2,294 2,409 2,126 2,345 2,427 2,677 2,248 2,439 2,568 2,975 2,378 2,536 2,716 3,305 2,515 2,638 2,874 3,673 2,660 2,743 3,041 4,081 2,813 2,853 3,217 4,535 2,976 2,967 3,404 5,040 3,147 3,086 3,601 5,600 3,329 3,209 3,810 6,223 3,521 3,338 4,031 6,915 3,725 3,471 4,265 7,684 3,940 3,610 4,512 8,538 4,167 3,754 4,774 9,487 4,408 3,904 5,051 10,542 4,663 4,061 5,344 11,715 4,933 4,223 5,653 13,017 5,218
Among the different methods used to forecast the future demand for station wagons and pickups the regression ( with GDP) method was found to be the viable option due to the fact that the regression ( with urban population) method resulted with R 2 (measure of goodness of fit) of 0.20, which is not the best compared to the R 2 of the regression ( with GDP) method which is significantly lower ( 0.59). On the other hand, the estimates
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The growth rate methods are based on the fact that factors such as GDP and population growth will influence demand in the same magnitude and proportion in the future as in the past which as the demand for the products is profoundly affected by growth in income and population size is a valid assumption. However, even if the influence exist, the proportion and magnitude of the influence may change. For instance, if one of the influencing factors is price and it is reduced substantially, then demand will tend to change differently.
Accordingly, even though each forecasting technique is based on a legitimate assumption they are also not free from drawbacks. Thus, the drawbacks of each alternative method impose a need to combine different methods in order to arrive at the best possible results. Combining the forecasts will provide a way to compensate for deficiencies in each method, as averaging the forecasts obtained by the different methods can contribute to the improvement of the forecasting accuracy, and the shortcomings of one technique can be offset by the advantages of another. In fact, this kind of approach is considered as better method as it takes into account the quantitative aspect and the qualitative judgments on the future changes. Furthermore, this method requires averaging of both extremes of over exaggeration and under estimation. The combined estimates of the future demand is computed by assigning 20% weights to each projection methods ( See Table 3.22).
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Projected Demand (Combined Year Estimate) 2009 2,223 2010 2,362 2011 2,511 2012 2,671 2013 2,844 2014 3,029 2015 3,229 2016 3,445 2017 3,678 2018 3,930 2019 4,202 2020 4,496 2021 4,814 2022 5,159 2023 5,534 2024 5,940 2025 6,381
As cab seen from Table 3.22 the local demand for station wagons and pickups in year 2009 is estimated to be 2,223 units and projected to reach 3,229 units and 4,496 units in
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Currently, the local producers/ assemblers of vehicles are Mesfin Industrial Engineering MIE), Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal Industry (MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS assemble small automobiles and since the envisaged plant assembles station wagons and pickups it do not compete with the existing local assemblers. However, there are three on pipeline projects that envisaged to assemble various types of vehicles. Holland Car has unveiled a new vehicle assembly plant 11 km west of Addis Ababa at a place known of Tatek, at a cost of 25 million Birr. The company is finalizing the assembling infrastructure for the Cassiopeia (a Greek word for prince of Ethiopia) factory which rests on a 30,000 sqm plot. When Cassiopeia begins operating at full capacity, it will assemble 1,000 pickup vehicles per year. Cassiopeia is a sister company of the first vehicle assembler in Ethiopia, Holland Cars, known for its Abay and Awash model. Lifan Group, one of the biggest privately-owned enterprises in China, is in the process of setting up a vehicle assembly plant in Ethiopia with an initial investment outlay of $10 million. Lifan Group is also the sole supplier of engines, motors and spare-parts for the local vehicle assembler i.e. Holland Car which produces Abay and Awash automobiles
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Belayabe Enterprise (BE), is firming up negotiations with Ethiopia's Oromiya Investment Bureau for a 15,000 meter square plot to establish a 65 million birr facility. BE has already started building a workshop on 2,800 sq.mt it has secured in Akaki. Three individuals; Aschalew Belay, Zenebe Belay and Abraham Solomon, all of who living in China for 25 years has established the company. BE envisaged assembling heavy trucks and construction machineries. Therefore, the major local competitor of the envisaged plant is Cassiopeia which has an annual assembling capacity of 1,000 vehicles. Accordingly, Table 3.23 shows
projected local assembling capacity, forecasted demand and the supply demand gap.
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Table 3.23 PROJECTED LOCAL ASSEMBLING CAPACITY , DEMAND PROJECTION AND THE SUPPLY DEMAND GAP FOR PICKUPS AND STATION WAGONS Projected Local Assembling Projected capacity Demand 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
2,223 2,362 2,511 2,671 2,844 3,029 3,229 3,445 3,678 3,930 4,202 4,496 4,814 5,159 5,534 5,940 6,381
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Supply Demand Gap 1,223 1,362 1,511 1,671 1,844 2,029 2,229 2,445 2,678 2,930 3,202 3,496 3,814 4,159 4,534 4,940 5,381
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The demand supply gap in Table 3.23 indicates the possible production frontier that the envisaged assembly plant can take over. It shows that there is unsatisfied demand for the product in the future which increases from 1,223 in year 2009 to 2,229 and 5,381 million tones in year 2015 and 2020 respectively.
The market share of an enterprise is influenced by a number of factors, amongst which are: Relative product quality, Marketing effort/expenditure, Marketing effectiveness, Competitors strength, and Relative price.
The envisaged assembly plant enjoys a strong price advantage over imported products due to the tax break provided by the government as compared to imported vehicles. Moreover, as the experience of Holland Cars PLCs product ( Abbay) indicates that locally assembled vehicles can be easily accepted in the market provided that the product has good quality that is comparable to imported ones. Accordingly, assuming that the envisaged assembly plant provide quality products and services with competitive price and with additional injection of sales promotion as well as other marketing mix, significant proportion of import could easily be replaced; and the market share of the new plant could be high.
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Table 3.24 MARKET SHARE Year Projected Demand supply gap 1,223 1,362 1,511 1,671 1,844 2,029 2,229 2,445 2,678 2,930 3,202 3,496 3,814 4,159 4,534 4,940 5,381 Market share 306 409 529 585 645 710 780 856 937 1,026 1,121 1,224 1,335 1,456 1,587 1,729 1,883
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
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In order to propose an appropriate product mix due consideration is given to existing fleet of pickups and station wagons . Accordingly, as can be seen from Table 3.25 of the total pickups and station wagons in the country during the period 1997 2005 on average the share of station wagon and pickups and trucks with a capacity of up to 70 quintal was 30% and 70% respectively. However, in order to be conservative and due to the fact that the heading pickups and trucks with a capacity of up to 70 quintal also includes larger trucks than pickups the recommended product mix is 40% for station wagon and 60% for pickups. Table 3.25 EXISTING NUMBER OF PICKUPS AND STATION WAGONS Pick up and trucks ( up to 70 quint.) 10,347 11,069 11,492 12,286 13,983 15,193 24,423 27,069 25,332
Station Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 wagon 6,094 6,101 7,847 8,090 5,535 5,603 6,282 6,984 7,001 % share 37 36 41 40 28 27 20 21 22
% share 63 64 59 60 72 73 80 79 78
Total 16,441 17,170 19,339 20,376 19,518 20,796 30,705 34,053 32,333
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3.8
vehicles. Locally assembled vehicles would have a significant price advantage over the imported product due to costs associated with transportation cost and government tax break which is only 5% for components to be assembled locally as compared to above 200% for vehicles . Furthermore, Ethiopia being a country where significant proportion of its population lives below poverty line consumers are, by and large, price conscious and consumption demand is very much sensitive to price. Therefore, the envisaged assembly plant will have price advantage against imported products. 3.9 MARKETING
3.9.1 GENERAL Marketing is an essential role of every business organization and marketing activities must be performed, to some extent, for the survival of every business organization. Although many factors affect an organizations marketing strategy, all marketing decision-making can be classified into four strategic elements, sometimes referred to as the marketing mix or the four Ps: Product, price, place (distribution) and promotion. While these four factors are important individually, their real significance lies in the mix, the unique way they are combined into a careful plan or strategy. The combination of these four factors is the foundation of any marketing plan. 3.9.2 PRODUCT
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The purchase of a car is a highly involved process when compared with other retail experiences. Mostly focus on consumer product evaluations, which are occurred during the stages of the consumer buying decision process, where knowledge about product attribute information is needed. Knowledgeable persons on the local vehicle market
indicates that most of vehicle buyers have incomplete information about product quality and limited understanding of technical attributes. Because of the limited product information, most of byres to rely on the brand name and company reputations. They can make buying decision without searching the products information. This is the repeat-purchase mechanism, where the good past performance and reputation will be rewarded with future profitable sales, and where the poor performance will be punished. Especially, in the face of highly competitive market, customer retention is critical . One way to protect products and markets from competitive inroads is to have highly satisfied customers, which minimize customer turnover . Not only the cost of retaining an existing customers cost less than the cost of acquiring a new customer but also existing customers cost less to maintain than newly acquired customers. Thus customer satisfaction is important. In the local market for vehicles there are a lot of brand choices of passenger car to compare and evaluate before making a purchase decision. With the severe competition among vehicle brand, it is very critical to understand the customer requirement and provide the products that satisfy the customer needs.
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Therefore, understanding of the vehicle attributes and characters on which consumer preference is based on is critically important and should be the base on which the marketing strategies of the envisaged plant is crafted.
Product Attribute can be defined as features that an object may or may not have. It can be identified into two classes: intrinsic attributes and extrinsic attributes. Each attribute provides the customer with a specific benefit that has some degree of utility .
Currently, a wide spectrum of vehicles in make, size and model populate the roads, however Toyota seems the most popular vehicle. A rapid survey of vehicle owners
reveals that the reasons which make Toyota preferable over other vehicles are availability and cost of spare part and fuel efficiency. Moreover, the following attributes are also found to be a critical factors considered while choosing vehicles.
Attractive Interior and exterior design Availability of safety measures like air bags Availability of central locking system and good quality stereo Accordingly, the above attributes should be given top priority by the envisaged plant Besides, quality control should also be given top precedence so that the envisaged assembly plant could achieve its aims through producing top quality products that can compete with imported vehicles in all aspects. .
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Pricing a product is an important and critical activity since it is the major factor in determining revenue. If a lower price is fixed, it will affect the profitability of the company, and if a higher price is fixed, the product will not be able to stand in market competition and may be forced out of the market. Therefore, the right price has to be fixed. The determination of selling price for a consumer-oriented product depends on a complex series of factors such as the production and marketing costs, distribution techniques, the prevailing competitors price and market conditions.
In general, price setting is done by selecting one of the two frequently used pricing approaches. The simplest method is cost-based approach (Cost-plus pricing), which involves adding a standard mark-up to the cost of the product, and competition based approach (going-rate pricing), which bases its price largely on competitors prices.
b)
At present, the price of imported pickups and station wagons are on the high side. Table 3.26 shows the price of imported pickups and station wagons which are comparable with the envisaged pickups and station wagons. Table 3.25
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S.No 1
1.1 TOYOTA PRADO ( GX15L ) 1.3 HONDA ( CIVICS) 1.4 NISSAN ( x - trail) 2 Pickups 1.1 TOYOTA ( HILUX) 1.2 FORD ( Ranger) 1.3 ISUZU ( DMAX ) 1.4 MISBUSHI ( l 200) 1.5 NISSAN
However, due to the tax privilege provided by the government the cost of locally assembled vehicles is expected to decrease dramatically which provides a critically important advantage for easy market penetration through price with out compromising quality. Therefore, the objective of the pricing policy should be to gain a foot hold in the market, curve out a sizable market share and sustain a reasonable profitability, which at the initial stage, could only be achieved through charging of lower prices that could influence consumers. Hence, it is reasonable to position the products at the lower end of the current prices that prevail in the market. fixing substantially lower
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Table 3.26 UNIT COST OF THE ENVISAGED ASSEMBLY PLANT PRODUCTS BY TYPE OF PRODUCT AND THE RECOMMENDED MARGIN AND SELLING PRICE Items Cost of imported components Sea and inland transport and duties Labour cost
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3.9.4 DISTRIBUTION a) General Distribution refers to enable the product reach to the consumers by the producer, while channel of distribution is the network of middlemen through whom the product flows till it finally reaches to the hands of the actual users or consumers. The availability of various distribution channels is at the same time an opportunity and a problem. The opportunity lies in the fact that the manufacturer can choose between different channels to close the gap between himself and the consumer of the product. The problem is now to find out accessibly is best suited channel to the needs of the customer. Thus, the choice of the right channel is a critical decision and a complex task, which has to be decided by considering a number of factors such as product and consumer characteristics. Channel of distribution varies in its form and length from consumer goods to industrial goods and within one class of goods; it varies from product to product. For a consumer market a retailer is essential, whereas in the industrial market the retailer can be eliminated. For a perishable commodity, the producer prefers few and controlled levels of distribution, while for durable and standardized goods a longer and diversified channel may be necessary. Size and average frequency of customers orders also influence the channel decision.
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Shopping goods, which are purchased after a careful consideration and comparison of quality, price and suitability, have a high unit price, are sold in few retail outlets. Thus, selective distribution strategy may be profitable. In the purchase of specialty goods, consumers have insight on a specific brand and do usually have adequate product information and have already made up their minds to go for a particular brand. For such products, exclusive distribution, where only certain dealers distribute the product will be ideal. b) Evaluation of Existing Distribution Practices At present, the assemblers and importers of vehicles sell directly to consumers through own sales branch ( show rooms) located in Addis Ababa and major towns such as Nazareth, Awassa, Bahir Dare, Dire Dawa etc. An ideal distribution system has economic benefits for both the manufacturer and the consumer and it involves the manufacturer or the intermediaries offering the 'right product' in the 'right quantities', at the 'right place', at the 'right time', at the 'right price' and with the 'right appeal'. The country offers a large and rapidly growing market for vehicles. However, final consumers are widely scattered in different geographical area of the country. Therefore, in order to exploit the market the envisaged factory needs to set up a distribution system,
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c)
Vehicles like any other products reaches the ultimate consumer through a defined distribution system. The system consists of two principal elements - a physical distribution and distribution channels. The former covers details on how the product gets physically from the manufacturer to the consumer and while the latter deals with a set of organizational relationship among the manufacturer and the various intermediaries or agents that influence the product's passage through the physical distribution system. The distribution channel has two parts - wholesaling intermediaries and retailers. The former are expected to handle the product ownership and movement from manufacturers to retailer. The highly visible process of selling to the consumer is the retailing side. Depending on the nature and characteristics of the product producers can also have the option of selling direct to consumers or retailers. The main objective of the producer is to secure most effective and profitable channel or path in the process of selling its product to the ultimate consumer. This objective, depending on the product and its demand diversity, can be either met by applying intensive distribution or selective distribution or exclusive distribution. The main alternative distribution channels commonly used by producers to reach consumers are the following.
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At first sight, it would seem that direct sale offer a greater degree of control, more efficient and less costly than indirect sale. This is, however, not necessarily true for a number of reasons. The various distribution functions need to be performed can be a huge burden for one enterprise attempting to cover all of them, several intermediaries cooperating and sharing responsibility for them may well be able to achieve a better overall result. The distribution risks delay in shipments, loss of merchandise, credit risk, seasonal and other variations in sales volume, etc. can also be absorbed more readily, if they are shared between several enterprises. Therefore, the distribution channel proposed for the envisaged assembling plant is both:Manufacturer And Manufacturer Consumer. Agent Consumer.
This distribution policy is proposed by considering the conventional wisdom, that there does exist a private sole agency with a high managerial quality skill, organizational network and adequate financial resources in marketing a significant amount of the companies products at national level. Furthermore, the above proposed distribution channel, i.e., dealing with main agents and also distributing directly to consumers have the following advantages.
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a) General Market promotion is an important part of the marketing mix , as it is required to create and increase consumer awareness , knowledge and readiness to buy through media communications (advertising) and through special offers to trade and / or consumers (sales promotion). However, it is important to realize that, on its own, market promotion will not replace selling, change long-term trends, or build long-term customer loyalty. It has to be supported by quality and distribution efficiency.
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An advertisement would be effective only if the target audience accepts the message and is motivated to take the required action. Thus, the sequence of events and advertisement should trigger is:Attract attention, Rouse interest, Build desire, Obtain buying action, Build brand image, and Maintain brand loyalty.
Initially, the objective of advertisement should concentrate in attracting attention for the product. Once product acceptance has been achieved, advertisement usually concentrates on building brand image and loyalty. However, in order to be successful an advertising campaign has to convey the right information to the right people in the right way. Thus, message creation and media
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While determining the feasible capacity for the envisaged assembling plant, different factors were considered, among which the main ones are discussed hereunder:
As depicted in the market study, station wagons and pickups are highly demanded in Ethiopian market. The projected demand for the products rises from 2,223 units in year 2008 to 6,381 units in year 2025 while the estimated market share of the envisaged assembly plant increases from 333 units to 1,595 units in the same years. The technology to be applied in the project and know - how is another important factor in determining the plant capacity. Specific processes are often related to certain levels of production or become technically and economically feasible only at such levels (minimum economies of scale). The nature of technology choice and usage constitutes a key factor in the determination of plant capacity.
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Moreover, based on the recommendation of the market study from the total annual production the share of pickups and station wagon is considered to be 60% and 40% respectively. Therefore, the annual assembling capacity of the envisaged plant at full capacity operation is selected to be 329 pickups and 219 station wagons
CHAPTER FIVE -
5.1 COMPONENTS , FINISHING AND AUXILIARY MATERIALS The components required to assemble in CKD-2 condition and which have to be imported are; Front floor Middle and rear floor Lower rill ( LH and RH) Upper parts of cowl panel Side panel ( LH and RH) Tail door Roof liner Engine compartment Left and right fender
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Items Cost of imported components Sea and inland transport and duties
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Accordingly, the total cost of raw material at full capacity operation is estimated at Birr 99,631,842 ( Birr 44,125,186 and Birr 55,506,656 for station wagon and pickup respectively. 5.2 UTILITIES Electricity is
consumed by process equipment including auxiliary equipment and lighting. Water for the process and the general purpose such as drinking, cleaning etc. is also considered. Accordingly, the total annual cost of utilities is estimated at Birr 540,000.
The first major step in assembly is the body shop. At this stage the car begins to take shape as sides are welded together and then attached to the underbody of the car. The underbody is composed of three primary pieces of galvanized steel that include the floor pan and components for the engine and chassis. After the underbody has been welded together, it is tested for dimensional and structural accuracy. It is then joined together in a tab-slot fashion with the side frame and various other side-assemblies. A worker then taps tabs into slots and clamps the tabs. Roof supports, and the roof, are now ready for installation. The car is now ready for final welding. After welding chassis lids and bonnets are installed.
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The primer-surface coating, unlike the initial electro deposition primer coating, is applied by spray application in a water-wash spray booth, usually via automatic profile tracking rotary atomizers. The primer-surface consists primarily of pigments, polyester or epoxy ester resins, and solvents. Due to the composition of this coating, the primer-surface creates a durable finish that can be sanded. The pigments used in this finish provide additional colour layers in case the primary colour coating is damaged. The water-wash spray booth is generally 30 to 70 meters long and applies the primer-surface in a constant air stream through which the vehicle body moves. A continuous stream of air, usually from ceiling to floor, is used to transport airborne particulates and solvents from primer-
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Following the baking of the clear coat, the body is inspected for imperfections in the finish. Operators finesse minor flaws through light sanding and polishing and without any repainting. Repairs of major flaws are carried out by repeating the sanding process and reprocessing the bodies in either a repair booth or a spot repair facility. The latter uses small amounts of catalysed paint applied with hand guns, followed by a lamp bake.
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Abay Trading and Technical S.C is located in a prime business area of Addis Ababa in Kirkos sub city kebele 10 with a total land area of 12,310 m 2. The location is ideal and all the necessary facilities for the operation of the envisaged assembly plant are readily available.
b)
Abay Trading and Technical S.C is engaged in provision of vehicle maintenance service. As a result the Company possesses most of the machinery and equipment required by the envisaged assembly plant. The technical assessment conducted by the consultants indicate that all the production as well as utility machinery and equipment are in good condition, except some replacement and modifications that may be required for efficient operation of the envisaged assembly plant. c) Power And Utilities Supply
Abay Trading and Technical S.C has got enough electrical power and municipality water connection for the envisaged assembly. Moreover, the company also have water well in its compound.
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d) Building The existing building of Abay Trading and Technical S.C can properly accommodate the machinery and equipment, raw materials, and the intermediate and finished products of the envisaged assembly plant with minor modification. The existing building comprise; Building for vehicle maintenance with different workshops ( engine overhaul, body work, electric shop, pump testing, general maintenance and paint and spray rooms) Spare part stores ( main stores, intermediate stores and satellite stores) Office building Employees club and cafeteria Vehicle washing and greasing area in the open Large store for tyres storage and distribution 6.2.2 ADDITIONAL MACHINERY AND EQUIPMENT REQUIRED
The additional machinery and equipment required comprise power tools, crane and hoists and testing equipment. The total cost of the additional machinery and equipment required is estimated at Birr 2,977,444.
Table 6.1 LIST OF ADDITIONAL MACHINERY REQUIRED AND THE CORRESPONDING COST
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2 3 4 5 6 7 8 9 10 11 12 15 16 17 18 19 20
1 set 1 set 1 set 1 set 3set 5set 1set 1set 1set 1set 1set 1set 1set 1set 1set 1set 1set
5,735.3
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6.2.3
a) Plant Layout The plant layout of the envisaged project is worked out to effectively respond to the smooth, logical and economical mass flow of materials and end product within the site premises as well as inside the production building.
While preparing the overall plant layout, due consideration was given to the proper utilization of spaces within the assembly plant. The raw material store and sites such as those accommodating material preparation and assembling line are made to be situated close to each other with enough access to facilitate the day-to-day traffic movement.
c)
The machinery and equipment for the envisaged assembly plant do not require any additional building. However, installing additional equipment such as cranes and rearranging the existing machineries according to the proposed plant lay out requires civil works. For rearranging the machinery lay out, the floor area, after the removal of the machineries, has to be covered with smooth cement screed having a thickness of 5 cm. Moreover, construction of fences, show room , minor repair on the asphalt road and painting of walls and steel structure will be carried out.
Accordingly, the total cost of the above civil works is estimated at Birr 250,000.
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CHAPTER SEVEN - ORGANIZATION AND MANPOWER 7.1 ORGANIZATION STRUCTURE The proposed organizational structure of the envisaged assembly plant comprises the following departments. Manpower and administration department, Technical and production department, Finance department, and Commercial Department.
The functions and responsibilities of the units in the proposed organizational structure are as described below: a) GENERAL MANAGER The General Manager with the assistance of the the department managers performs the following duties; Plan, Organizes, directs, coordinates and controls all the activities of the plant ; In consultation with the concerned departments, hires, promotes and dismisses personnel that are accountable to the departmental managers as per established systems and procedures;
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In collaboration with the concerned departments, administers job evaluations, salary scales and incentive systems. Also handle other staff benefits such as medical, pension, staff loan etc and controls their costs;
Makes sure that the properties of the plant are identified, well protected, safely handled and guarded; Ensures that the plant has appropriate insurance polices for its personnel and properties. Follows up claims in case of accidents; Makes sure that each personnel file is up-to-date and well documented with the pertinent information. Handles also the general archives and records management system;
Prepares the annual budget of the department and ensures the proper utilization and handling of the resources allocated to it; and Prepares and submits periodic management reports about the department and its achievements.
c) FINANCE DEPARTMENT
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Establishes costing standards and selling prices in collaboration with the concerned departments; Ensures timely reconciliation of bank accounts, creditors, debtors and other accounts; Effectively manages the working capital of the factory and with the approval of Management, arranges short and long term bank credits; Prepares and issues daily, monthly and annual financial reports; and In collaboration with the concerned departments, conducts cash & stock counts as and when necessary.
d) COMMERICIAL DEPARTMENT The department conducts the following duties and responsibilities. Plans, organizes directs, coordinates and controls the overall activities of sales and purchase and the store and property administration;
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e) PRODUCTION AND TECHNICAL DEPARTMENT The department carryout the following duties and responsibilities: Plans, organizes, directs, coordinates and controls the overall assembling ; Establishes modern assembling systems that would enhance the productivity and effectiveness of the plant and ensures its implementation; Supervises allocation of workers and machines, minimizes idle time; Assesses the skill and efficiency of the workers and proposes development programmes;
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General Manager
Finance Department
Commercial Department
General Service
Inspection Store and Supplies Division After sales Service Marketing Division
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According to the clients component supplier only 18 production workers are required for SKD parts assembly plant. However, as indicated earlier we have shifted to CKD-2 parts assembling in order to be entitled to the tax incentives. Considering the productivity level of the local works around 77 workers and management staff are required for the smooth and efficient operation of the envisaged assembly plant in full capacity operation. The concept of assembly line originated the motor vehicle manufacturing industry. The production process of assembly of motor vehicle is preceded by extensive design work, engineering, testing and production planning. These tasks often require years and huge amount of money. But in our case the design and engineering parts of the work will be accomplished by the clients principal. Executives and manager establish guidelines to follow from the earliest stages of
planning and design the specialists help assess whether the vehicle will satisfy consumed demand, meet safety and other local regulations and proves economically practical to make . Industrial production manager oversee-blue-collar worker supervisors
These supervisors (forman ) oversee skilled craft and repair workers, operators and laborers , and coordinate all production activities scheduling, staffing equipment, quality control and inventory control. A variety of manufacturing process are used like fitting and fixing of parts, parts painting and electrical installation etc Through the assembly process statistical process control (team work and quality control) is emphasized. From initial planning to final assembly, numerous tests and inspections insure that vehicles meet quality and safety standards. Operators, technicians, and laborers comprise over half of the industry employment. These workers need physical stamina and
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S. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Job title Plant manager Secretary Technical and production department head Production head Commercial department head Financial department head
Qualification BSC Mech. Eng. Secretarial science BSC. Mec. Eng. Chinese BSC in marketing BA Accounting
Number of persons 1 1 1 1 1 1 1 1 2 3 1 1 14 16 3 3 3
Administration department head BA. Mang.. Inspection Head Inspectors Forman After sales service head Receptionist Senior machines Mechanics Upholstery senior Upholstery Senior electrician Chinese 10+3 Chinese 10+3 10+3 10+3 10+3 No formal education No formal education 10+3
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10+3 10+3+Driving license 10+2+Transtior license College Diploma 10+3 College dip marketing 10+3+Driving license 10+3 10+3 10th Grade+2GradeDrL 10th Grade+ 3GradeDrL
7.4
LABOUR COST
In estimating the labour cost of the envisaged assembly plant the various activities that have to be performed to assemble a vehicle was taken in to consideration and for each activities based on the complexity of the task the number of workers and the time required to achieve the task is estimated first than based on the estimated number of workers and time the labour cost for each task is estimated. ( See Table 7.2)
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Table 7.2 ESTIMATED LABOUR COST FOR ASSEMBLING ONE UNIT VEHICLE Labour Cost ( in Birr ) 1,200 550 450 850 500 400 200 450 350 450 200 1,000 900 1,500 500 250 450 250 400 1,250 350 1,100 850 550 150 350 350 150 250 150
Sr.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Activities Engine and engine parts mounting Fuel system and air filter assembly Muffler system assembly Clutch system assembly Transmission system assembly Front axle and rear axle assembly Propeller shaft system assembly Deferential assembly Frame system assembly Suspension system assembly Wheel system assembly Steering system assembly Braking system assembly Electronic parts assembly Instrumental panels assembly Name plate and in car tools system assembly Door wiring harness system assembly Lamp system assembly Body suspension system assembly Body floor system assembly Wiper and wind shield assembly Front well system assembly Side window system assembly Sun roof and rack system assembly Safety belt system assembly Front door lock and front door system Rear door lock and rear door system Tail door system assembly Seat system assembly All hock and lock assembly
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As can be seen from the above Table the cost of labour for assembling one vehicle is estimated at Birr 32,550. Therefore, at full capacity operation the total labor cost is estimated at Birr 17,837,400. 7.3 Training Needs Faced with technological advances and the continued need to cut costs manufactures increasingly emphasize continuing education and cross-train many workers, that is, they train workers to do more than on job. This has led to a change in the profile of the industrys workers. Standards for new hires are much higher now than in the part. Employers increasingly require a minimum of a high school diploma as a number of unskilled jobs declines. The average worker is expected to work with much less supervision than in the part and needs to be self-motivated. Because many plants now emphasize the team approach, employees interact more with co-workers and superiors to determine the best way to get the job done. Therefore, employers look for employer with good communication and math skills, as well as an aptitude for computers, problem solving and critical thinking. However, manual dexterity will continue to be necessary in many production jobs. Opportunities for training and advancement vary considerably by occupation, plant size and sector. Training programs in large auto and light truck assembly plants usually are
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CHAPTER EIGHT FINANCIAL ANALYSES 8.1 BASIC ASSUMPTION FOR FINANCIAL ANALYSIS
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It is assumed that the processes of acquiring Abay Trade and Technical SC, financial arrangements , negotiation with the parts supplier and carrying out modification of the existing building and machinery at Abay Technical will take one year. With regard to operational life of the project, a standard assumption of 10 years is considered. Hence, the costs and benefits of the project are computed over 11 years. 8.1.2 REPAIR AND MAINTENANCE COST
The annual repair and maintenance cost of the envisaged plant is estimated based on the following rates.
Item
Rate
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Insurance cost is computed based on the following rates Item a) Machinery and equipment b) Vehicles c) Fidelity guaranty 8.1.4 DEPRECIATION AND AMORTIZATION Rate 0.4 % of total cost 4% of total cost 0.3 % of daily sales
The following depreciation rates are applied to depreciate the assets of the project: Buildings and associated Civil works Agricultural Machinery and Implements Vehicles Office furniture 5%, linear to scrap Value 10%, linear to scrap Value 20% linear to scrap Value 10%, linear to scrap Value
8.1.5
Salvage value of the project is computed based on the following rates a) Building 50%
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8.1.6
WORKING CAPITAL
The working capital requirement of the project is computed based on the minimum days of coverage required for the various components that constitute the working capital. Accordingly, the following minimum days of coverage are assumed. Inventory Raw materials Work in progress Minimum Days of coverage 90 5 30 30 5 30 30
Finished product b) c) d) Accounts Receivables Cash in hand Accounts Payable Repair and Maintenance Labor
8.1.7 DISCOUNTING The total investment and equity capital of the project are discounted at 10.5 per cent over the life of the project.
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According to the Investment Incentives Council of Ministers Regulations No.7/1996, the project is entitled to the following incentives: Income tax exemption for 3 years Losses carry forward for 2 years, and Exemptions from payment of custom duty on machineries and equipments
For the rest of projects life, a 30% tax rate is applied on the taxable income.
8.1.10
BANK LOAN
The type of loan is assumed to be a constant principal bank loan, with a loan repayment period of eight years. The annual interest rate including the various fees is taken to be 8.5 per cent. The interest accrued during construction period is capitalized. 8.1.11 OTHER ASSUMPTIONS Travel and per diem Audit fee Employees benefit Telephone, fax, stationery Cleaning materials Promotion expense Birr 140,000 Birr 15,000 17% of gross salary Birr 100,000 Birr 10,000 Birr 150,000
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8.2
The financial analysis of this project is carried out based on the results of the investment and operational costs discussed in previous sections and the above assumptions. The analysis is done using Computer Software for the Financial Analysis and Reporting(COMFAR)software developed by UNIDO. 8.2.1 SCENARIO I a) Investment Capital
Total investment cost of the project is estimated at Birr 44.11 million ( See Table 8.1). Out of the total investment requirement of the project Birr 24.87 million is the value of existing asset at Abay Technical and Trading Share Company while Birr 19.23 million is accounted by additional investment costs. Table 8.1 INVESTMENT COST ( in 000 Birr)
Items Civil works, structures and buildings Plant machinery and equipment Vehicles Office furniture and equipment Initial working capital*
Existing asset at Abay Technical and Trading Share Company 22,540.55 889.75 1,045.00 402.45 -
Additional investment 250 3,187.66 600 14,854.99 Total 22,790.55 4,077.41 1,645.00 402.45 14,854.99
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* The working capital required will be mainly used for the procurement of material and to
cover related operational expenses. Based on the minimum days of converge indicated earlier the total working capital required at full capacity operation is Birr 28.04 million. However, only the initial working capital of Birr 13.46 million during the first year of operation will be funded through external sources during the remaining years the working capital requirement will be financed by funds generated internally. ( for detailed working capital requirement see Annex 9.A.1)
b) Cost Of Production Operating cost of the project includes material cost, labor cost, depreciation expense etc as shown below in Table 8.2 for a selected year. The detailed cost breakdowns are indicated in Annex 9.A.2. From the total annual cost of production which amounts to Birr 112.15 million the highest share is accounted by raw material (93.82%) followed by cost of labour (1.51%) and financial cost (1.16%)
Table 8.2 OPERATING COST FOR SELECTED YEAR( YEAR 4 in 000 Birr) Particulars Raw materials Utilities Spare parts Repair and maintenance Labour Labour overhead costs Cost 105,230 540 298 240 1,693 412 % share 93.82 0.48 0.27 0.21 1.51 0.37
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c) Financial Flow
In this scenario it is assumed that the cost of acquiring Abay Technical and Trading Share Company will be covered by the promoter of the project while the additional investment cost will be covered through bank loan. Table 8.3 shows the proportion of equity and bank loan. Table 8.3 SOURCE OF FINANCE
Equity 24,877.7 5
d) Loan Repayment Schedule It is assumed that the bank loan including interest will be paid back with in eight years. The type of loan is assumed to be constant principal. Table 8.4 shows detail repayment schedule. Table 8.4
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Year
1 2 3 4 5 6 7 8 9 10 11 Total
Interest payable 0 1,497.90 1,497.90 1,296.27 1,077.50 840.14 582.61 303.18 0 0 0 7,095.49
e) Cash Flow The projected cash flow of the project shows that the project would generate positive net cash flows throughout the operation years. Cumulative cash flow generated by the project towards the end of the operation (year 11) will amount to 129.79 million. ( See Annex 9.A.3) f) Income Statement Based on the projected profit and loss statement shown in Annex 9.A.4, the project will generate a profit through out its operation life. Annual net profit after tax will grow from Birr 6.5 million during first year of operation to Birr 10.98 million. Net profit as % of sales revenue is modest which lies between 8-10 %. Net profit to equity and net profit to total investment or return on investment (ROI) are also attractive. g) Discounted Cash Flow
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The break-even analysis establishes a relationship between production costs and revenues. It indicates the level of production at which costs and revenue are in equilibrium. To this end, using full capacity operation costs of the 4 th year of operation, the break-even point for capacity utilization is computed as followed. BE = Fixed Cost Sales Variable cost = 36 %
j)
Sensitivity Analysis
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As can be seen from the above Table ,the project is very sensitive to decrease in revenue and increase in production cost in case of above 13% decrease in revenue and 15% increase in production coast the project will not be viable. However, investment cost increase by 10-30 % still show an IRR between 23.71 and 20.92%.
k) Ratios In financial analysis financial ratios and efficiency ratios are used as an index or yard stick for evaluating the financial position of a firm. It is also an indicator for the strength
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Total investment cost of the project is estimated at Birr 43.88 million ( See Table 8.6). Out of the total investment requirement of the project Birr 24.87 million is the value of existing asset at Abay Technical and Trading Share Company while Birr 19 million is accounted by additional investment costs.
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Existing asset at Abay Technical and Trading Share Company 22,540.55 889.75 1,045.00 402.45 24,877.75
Items Civil works, structures and buildings Plant machinery and equipment Vehicles Office furniture and equipment Initial working capital* Pre production cost** TOTAL INVESTMENT COSTS
* The working capital required will be mainly used for the procurement of material and to
cover related operational expenses. Based on the minimum days of converge indicated earlier the total working capital required at full capacity operation is Birr 28.04 million. However, only the initial working capital of Birr 13.46 million during the first year of operation will be funded through external sources during the remaining years the working capital requirement will be financed by funds generated internally. ( for detailed working capital requirement see Annex 9.B.1)
b) Cost Of Production
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Table 8.7 OPERATING COST FOR SELECTED YEAR( YEAR 4 in 000 Birr) Particulars Raw materials Utilities Spare parts Repair and maintenance Labour Labour overhead costs Administrative overhead costs Depreciation Marketing costs Financial costs TOTAL PRODUCTION COSTS Cost 105,23 0 540 298 240 1,693 412 728 1,218 500 2,476 113,33 5 % share 92.85 0.48 0.26 0.21 1.49 0.36 0.64 1.07 0.44 2.18 100
c) Financial Flow
In this scenario it is assumed that the source of finance will be 30% equity and 70% loan. Accordingly, . Table 8.8 shows the proportion of equity and bank loan.
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
Equity 12,652,419
Loan 31,230,271
Total 43,882,690
d) Loan Repayment Schedule It is assumed that the bank loan including interest will be paid back with in eight years. The type of loan is assumed to be constant principal. Table 8.9 shows detail repayment schedule. Table 8.9 LOAN REPAYMENT SCHEDULE Capitalized Debt Disbursement interest Repayment balance 20,093.63 1,707.96 0 21,801.59 9,428.68 0 0 31,230.27 0 0 2,105.16 29,125.11 0 0 2,284.10 26,841.01 0 0 2,478.25 24,362.76 0 0 2,688.90 21,673.86 0 0 2,917.46 18,756.41 0 0 3,165.44 15,590.97 0 0 3,434.50 12,156.47 0 0 3,726.43 8,430.03 0 0 4,043.18 4,386.85 0 0 4,386.85 29,522.31 1,707.96 31,230.27 Interest payable 0 2,654.57 2,654.57 2,475.63 2,281.49 2,070.83 1,842.28 1,594.29 1,325.23 1,033.30 716.55 372.88 19,021.64
Year 1 2 3 4 5 6 7 8 9 10 11 12 Total
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
The break-even analysis establishes a relationship between production costs and revenues. It indicates the level of production at which costs and revenue are in equilibrium. To this end, using full capacity operation costs of the 4 th year of operation, the break-even point for capacity utilization is computed as followed. BE = Fixed Cost Sales Variable cost = 38 %
j)
Sensitivity Analysis
A sensitivity analysis on selected cost components has been further conducted to test the strength and viability of the project. In view of this, extreme conditions like cost escalation on investment and operating cost and a decrease of revenue due to various factors have been therefore examined and the result is as shown in Table 8.10.
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
As can be seen from the above Table ,the project is very sensitive to decrease in revenue and increase in production cost in case of above 12 % decrease in revenue and 14% increase in production coast the project will not be viable. However, investment cost increase by 10-30 % still show an IRR between 21% and 17%.
k) Ratios In financial analysis financial ratios and efficiency ratios are used as an index or yard stick 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 has been carried out over the period of the project life and all the results of the financial and efficiency ratios for the project are found to be satisfactory (see Annex 9.B.4 and 9.B.6)
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
We reached to the followings conclusion after the assessment of the market condition the local management capability and productivity level of work force, rules and regulation of the country and other relevant external environments.
The idea of establishment of SKD parts local assembly plant couldnt give the necessary out-put to win the automotive market in Ethiopia; CKD-2 parts assembly plant could be ideal solution to meet the requirement of Ethiopian customs Authority to be entitled to the tax privilege; There should be a FOB price difference between fully assembled automobile, SKD,CKD-1 and CKD-2 parts, which should be visible to any interested party also could be used as a key parameter to win the market by reducing the cost of production using Ethiopian Customs Authoritys regulatory institution; Unless other wise the cost difference between the above three different parts assembly stage create clearly visible selling price gap, it will be difficult to entertain customers with duty free privilege specially in 4WD pick-up sales and also can hindered the marketing process of station wagon; tax privilege and also investment supports from Ethiopian Investment Authority and other government
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
Flexible automotive assembly plant is needed to give a room to adjust production output according to the market condition; Implementation of QMS and IPM is vital for the successes of the assembly plant The study shows that there is a relatively large and progressively growing local market for station wagons and pick ups The financial analysis has been done under two scenarios. The first scenario assumes that the investment requirement for acquiring Abay Trade and Technical SC will be covered by equity capital and the additional investment requirement will be covered through bank loan . Under the second scenario, it is assumed that the total financial requirement i.e. investment requirement for acquiring Abay Trade and Technical SC and the additional investment will be covered through 30 per cent equity and 70 per cent long-term bank loan. The analysis has revealed that the project is viable in both scenarios considered for this study with a Net Present Value (NPV) of Birr 48.01 million and 50.03 million, discounted at 10 per cent, and an Internal Rate of Return of 25.39 and 25.87 per cent for scenario one and two respectively.
9.2
RECOMMENDATION
We recommend the followings for the successful implementation of the project and viability of the assembly plant.
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant
_____________________________________________________________ Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant