187.

PROFILE ON PERMANENT HANDICRAFTS

DISPLAY AND SALES CENTER

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TABLE OF CONTENTS
PAGE
I.

SUMMARY

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II.

SERVICE DESCRIPTION

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III.

MARKET STUDY AND SALES CAPACITY

A. MARKET STUDY
B. SERVICE CAPACITY & SALES PROGRAMME

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187-4
187-7

IV.

MATERIALS AND INPUTS

A. MATERIALS
B. UTILITIES

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187-8
187-8

V.

FURNITURE & EQUIPMENT, & LAND, BUILDING & CIVIL

WORKS
A. FURNITURE & EQUIPMENT
B. LAND, BUILDING & CIVIL WORKS

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187-9
187-9

VI.

MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

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187-9
187-10

VII.

FINANCIAL ANLYSIS
A. TOTAL INITIAL INVESTMENT COST
B. OPERATION COST
C. FINANCIAL EVALUATION
D. ECONOMIC BENEFITS

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187-11
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187-12
187-14

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I.

SUMMARY

This profile envisages the establishment of a permanent handicrafts display and sales
center with sales capacity of 10,000 gift articles per annum.
The present demand for the proposed service is estimated at 228,198 pieces per annum.
The demand is expected to reach at

787,803 pieces by the year 2020 .

The total investment requirement is estimated at about Birr 643.20 thousand. The service
will create employment opportunities for 7 persons.
The project is financially viable with an internal rate of return (IRR) of 27.98 % and a
net present value (NPV) of Birr 698.37 thousand discounted at 8.5%. The project will
earn foreign exchange through setting its products to foreign tourists.
II.

SERVICE DESCRIPTION

A handicraft can be defined as a product which is artistic in character and requires skills
and craftsmanship in its manufacture. This indicates that there is a predominance of the
skill of the hand and artistic value. It is the combination of these two qualities which
distinguish a handicraft article from a product that is manufactured in a modern industry.
The handicraft articles which shall be displayed and sold in the centre are mainly used as
gift articles, and are broadly grouped as follows
Wood carvings (mask, comb, bowls, cups, etc.);
Hand woven textiles (netella, gabi etc,);
Jewelries (rings, bracelets, earrings, necklace, etc.);
Pottery products (gan, mitad, pot, bowls, etc.);
Leather goods (chairs, beds, bags, etc.);
Bamboo articles (baskets, partitions, etc.) ;

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Paintings (oil on canvas, acrylic on bamboo, etc.);
Traditional musical instruments;
Traditional baskets and containers;
Furniture (Tables, chairs, beds, etc.) ; and
Others.
III.

MARKET STUDY AND SALES CAPACITY

A. MARKET STUDY
1.

Current Demand and Supply

Handicraft is an ancient industry in Ethiopia which is handed over from generation to

generation. A handicraft can be defined as a product which is artistic in character and
requires skills and craftsmanship in its manufacture.

This indicates that there is a

predominance of the skill of the hand and artistic value. It is the combination of these
two qualities which distinguish a handicraft article from a product that is manufactured in
a modern industry.
A handicraft product has various applications. Depending on the type of the product it
can be used as a household good, personal ornament, house decoration and gift article.
Because of the distinctive character of a handicraft product it has a wide demand in the
domestic as well as export market.
Items that can be promoted in the handicraft display and sales centers can include
textiles (traditional clothes, carpets etc), metal wares such as silver, brass and copper,
wood carvings, stone carvings, pottery products, traditional toys, artistic leather goods,
articles of horn and bone, bamboo articles, traditional musical instruments and the like.
The envisaged products have two market segments i.e. local house holds and tourists.
However, for estimating the demand foreign tourists which are the major market for the
product are considered.

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The total number of international tourists arriving in Ethiopia is steadily increasing. As

can be seen from Table 3.1 during the period 1999-2005 the number of tourist visiting the
country have been consistently increasing. The growth rate registered in each year varies
from year to year however, on average during the period under consideration tourist
visiting the country have been growing at an average rate of 12 % per annum.
Table 3.1
TOTAL TOURIST ARRIVAL IN ETHIOPIA

Year
1999
2000
2001
2002
2003
2004
2005
Average

Number
115,000
135,954
148,438
156,327
179,910
184,077
227,398
163,872

Source; Tourism Commission of Ethiopia.

To estimate the present demand for handicrafts, the following assumptions are used.
-

Out of the total number of tourists visiting the country, 80% will purchase one
item of handicraft.

The average growth rate of tourist arrival witnessed during the period 1999
2005, i.e., 12% will also continue in the near future.

Accordingly, based on the above assumptions and taking the 2005 level of tourist arrival
and applying a growth rate of 12%, the current 2007 number of tourists visiting the

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country is estimated at 285,248 and the corresponding demand is estimated at 228,198
pieces of various handicrafts.
2.

Projected Demand

As a land of multiple tourist attractions and a visitor friendly people, which is conscious
of its historical heritage, Ethiopia is truly a country of great tourism potential. Ethiopia
possesses numerous tourist attractions varied in type and appealing to a wide range of
interests. The attractions include: historical, cultural, archaeological, anthropological,
scenic, climatic, therapeutic, and wildlife resources.
Therefore, it can be concluded that the number of tourists visiting the country will
increases tremendously in the future. However, in order to be conservative it is assumed
that the average annual growth rate of tourist arrival will be about 10% and as a result it
is also assumed that the demand for handicrafts will also grow at the same rate.
Accordingly, the projected demand for handicrafts computed by taking the estimated
present demand as a base and applying a 10% growth rate is shown in Table 3.2.

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Table 3.2
PROJECTED DEMAND (PIECES)

Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
3.

Projected Demand
251,018
276,120
303,732
334,105
367,516
404,267
444,694
489,164
538,080
591,888
651,077
716,184
787,803

Pricing and Distribution

Based on current average price of gift articles, an average sales price of Birr 100/ piece is
adopted for financial analysis.
B.

SERVICE CAPACITY AND SALES PROGRAMME

1.

Service Capacity

The merchandizing (sales) capacity of the proposed business depends on demand

projection of the handicraft articles. The annual sales volume of the projects is 10,000
gift articles, based on 300 working days and 10 hours per day.
2.

Sales Programme

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Table 3.3 shows the sales programme of the project. Full capacity sales could be attained
in the third year and thenafter. In the first and second year, only, 70% and 90% of the
sales capacity shall be achieved, since the project needs some time to promote its
business through different medias.
Table 3.3
SALES PROGRAMME
Sr.
No.
1
2

Products
Gift articles (pcs)
Sales capacity utilization

1
7,000
70

Project Year
2
9,000
90

3-10
10,000
100

rate (%)
IV.

MATERIALS AND INPUTS

A.

MATERIALS

The major activities of the centre are purchasing and sales of handicraft articles.
Therefore, the cost of articles is estimated at Birr 500,000 per annum at full sales
capacity. All materials are locally available.
B.

UTILITIES

Electricity and water are utilities of the project which are consumed for room lighting and
cleaning. The annual cost of utilities is estimated at Birr 25,000.

V.

FURNITURE & EQUIPMENT, LAND, BUILDING & CIVIL WORKS

A.

FURNITURE AND EQUIPMENT

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The show room must be equipped with traditional furniture and costumes, floor
coverings, wall paintings, shelves, partitions, lighting system, etc. The internal decorate
of the show room is estimated to be Birr 250,000.
B.

LAND, BUILDING AND CIVIL WORKS

The total built up area required for the project is 200 m 2. Out of the total built up area,
125 m2 will be used for show room, 50 m2 for store & 25 m2 for office. The building
should be decorated with traditional motives and facades to attract tourists.
It is assumed that the envisaged project will rent the required space. Accordingly, at the
rate of Birr 50 per m2 / month the annual rental cost is estimated at Birr 120,000.

VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The list of manpower and the annual labour cost is indicated in Table 6.1.

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Table 6.1
MANPOWER REQUIREMENT AND LABOUR COST
Sr.
No.
1
2
3
4

B.

Description

Req.

Monthly

No.
1
3
1
2
7

Salary (Birr)
2,000
3,000
1,500
800
7,300
1,825
9,125

Manger
Sales women
Accountant
Guards
Sub-Total
Benefit
Total

Annual Salary
(Birr)
24,000
36,000
18,000
9,600
87,600
21,900
109,500

TRAINING REQUIREMENT

The training requirement is practically negligible.

VII.

FINANCIAL ANALYSIS

The financial analysis of the permanent handicrafts display and sales center project is
based on the data presented in the previous chapters and the following assumptions:Source of finance

30 % equity
70 % loan

Bank interest

8.5 %

Discount cash flow

8.5%

Accounts receivable

30 days

Material local

30 days

Cash in hand

5 days

Accounts payable

30 days

Repair and maintenance

5% of annual working premises rental cost

A.

TOTAL INITIAL INVESTMENT COST

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The total investment cost of the project including working capital is estimated at Birr
643.20 thousand. The major breakdown of the total initial investment cost is shown in
Table 7.1.
Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
No.

Cost Items

Local
Cost

Foreign
Cost

Total
Cost

Land lease value

Building and Civil Work

Machinery and Equipment

Furniture and Equipment

250.00

250.00

Vehicle

275.00

275.00

Pre-operation Expenditure*

60.68

60.68

Working Capital

57.52

57.52

Total Investment cost

643.20

643.20

* N.B Pre-production expenditure includes interest during grace period ( Birr 35.68
thousand), and Birr 25 thousand costs of registration, licensing and formation of the
company including legal fees, commissioning expenses, etc.

B.

OPERATION COST

The annual production cost at full operation capacity is estimated at Birr 871.89 thousand
(see Table 7.2). The material cost accounts for 57.35 percent of the operation cost. The
other major components of the operation cost are working premises rental , depreciation ,
and direct labour which account for

13.76%, 9.18% and 6.03% respectively. The

remaining 13.69 % is the share of labour overhead, utility, repair and maintenance,
financial cost and administration cost.

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Table 7.2
ANNUAL OPERATING COST AT FULL CAPACITY ('000 BIRR)
Items
Material and Inputs

Cost

500.00
25.00

57.35
2.87

12.50
52.56

1.43
6.03

Administration Costs

21.90
35.04

2.51
4.02

Working premise rental

Total Operating Costs
Depreciation

120.00
767.00
80.00

13.76
87.97

Cost of Finance

24.89

2.85

871.89

100

Utilities
Maintenance and repair
Labour direct
Labour overheads

9.18

Total Production Cost

C.

FINANCIAL EVALUATION

1.

Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 37.46 thousand to
Birr 206.84 thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 1.20 million.

2.

Ratios

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In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3.

Break-even Analysis

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

Fixed Cost

60 %

Sales Variable Cost

4.

Payback Period

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

5.

Internal Rate of Return

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The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 27.98 %
indicating the vaiability of the project.
6.

Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value.

It is a

standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.
Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 698.37 thousand which is acceptable.
D.

ECONOMIC BENEFITS

The project can create employment for 7 persons.

The project will generate Birr 4.57

million in terms of tax revenue. It has also a potential to earn foreign exchange through
selling the gift articles to foreign tourists.