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123.

PROFILE ON EUCALYPTUS OIL

123-2 TABLE OF CONTENTS

PAGE

I.

SUMMARY

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II.

PRODUCT DESCRIPTION & APPLICATION

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III.

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

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IV.

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

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V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

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VI.

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

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VII.

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

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123-3 I. SUMMARY

This profile envisages the establishment of a plant for the production of eucalyptus oil with a capacity of 76.5 tonnes per annum.

The present demand for the proposed product is estimated at 596 tonnes per annum. The demand is expected to reach at 4,853 tonnes by the year 2022.

The plant will create employment opportunities for 18 persons.

The total investment requirement is estimated at about Birr 5.80 million, out of which Birr 3.74 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 27 % and a net present value (NPV) of Birr 4.48 million discounted at 8.5%.

II.

PRODUCT DESCRIPTION AND APPLICATION

Eucalyptus oil is obtained from the leaves of several species of eucalyptus.

The main

constituent of the oil is cineole, and the minimum commercially acceptable cineole content is 70%.

Eucalyptus oil is very useful in the pharmaceuticals industry for the preparation of cough drops, mouthwash, gargles, dental formulation, inhalants, room sprays and medicated soaps. It is also an important disinfectant.

123-4 III. MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Eucalyptus oil is an essential oil mainly used for medicinal purposes. The country's demand for the product is currently met through import. Table 3.1 depicts the amount of essential oil imported during 1997-2006. Apparently, imports of the product exhibit a consistently rising trend. Total imports averaged at 518.65 tons during the period under reference.

Table 3.1 IMPORTS OF ESSENTIAL OIL (TONS)

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Average

Imports 318.65 360.34 311.01 291.45 374.33 522.76 542.07 637.58 839.10 989.22 518.65

Source: Customs Authority, External Trade Statistics, 1997-2006.

123-5 Assuming supply was driven by demand, the average annual supply of essential oil for the period under reference, which constitutes only imports, is considered as the effective demand for the product for the year 2006. The average rate of growth of imports of essential oil during the reference period is computed to be 15%. This rate of growth is adopted in estimating the demand for the product. The present demand for the product (i.e. 2007) is thus estimated at 596.45 tons. 2. Demand Projection

As stated above, a 15% rate of growth is used in projecting the demand for eucalyptus essential oil. The projected demand for the product is shown in Table 3.2. Table 3.2 PROJECTED DEMAND FOR EUCALYPTUS ESSENTIAL OIL (TONS) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Projected Demand 596.45 685.91 788.80 907.12 1043.19 1199.67 1379.62 1586.56 1824.55 2098.23 2412.96 2774.91 3191.14 3669.81 4220.29 4853.33

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3.

Pricing and Distribution

Based on the CIF price of the external trade statistics for 2006 (the latest data available), and allowing 30% for import duty and other clearing expenses, the factory gate price for the envisaged plant is estimated at Birr 63,780 per ton.

The envisaged plant can supply its product directly to users. The plant can also appoint agents at selected locations.

B.

PLANT CAPACITY AND PRODUCTION PROGRAM

1.

Plant Capacity

The annual production capacity of the envisaged plant is 76.5 tonnes of oil in three shifts operation based on 300 working days.

2.

Production program

Considering the gradual development of processing skill and marketing of the product, the rate of capacity utilization during the 1st and 2nd year of production will be 75% and 85%, respectively. Full capacity will be attained in the third year and thenafter. production program is indicated in Table 3.3. The

Table 3.3 PRODUCTION PROGRAMME Description 1 1 2 Eucalyptus oil (ton) Capacity utilization rate (%) 57.38 75 Production Year 2 65.03 85 3-10 76.5 100

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IV.

RAW MATERIAL AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

Eucalyptus trees are cut when five years old. At this age the plantation yield about 70000 kg/ ha of leaves and at least 140 m3 of wood (solid) without bark. The same plantation can yield 4 to 5 cuts.

The ratio of oil to leaves (eucalyptus globules ) is in the range of 2.5 to 2.7% (by weight).

The raw and auxiliary materials are the eucalyptus leaves and tin-plated drums of 200 kg capacity. Table 4.1 indicates the annual raw material requirements and its cost at full

capacity production.

Table 4.1 RAW AND AUXILIARY MATERIAL REQUIREMENT AND COST (AT FULL CAPACITY PRODUCTION)

Raw Material

Unit

Qty

Cost (000 Birr)

1 2

Eucalyptus leaves Tin-plated drums capacity) Total

Ton (200 kg pcs

3060 383

1621.8 45.96

1667.76

123-8 B. UTILITY

Electricity, furnace oil and water are utilities of the project. Table 4.2 indicates the annual utilities cost and consumption of the proposed steam distillation unit. The total annual utility cost is estimated to be Birr 881,430.

Table 4.2 ANNUAL UTILITY REQUIREMENT & COST

Utility

Unit

Qty

Cost (000 Birr)

1 2 3

Electricity Furnace oil Water Total

kWh Lt M3

50,000 153,000 3,000

23.7 827.73 30 881.43

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

Steam distillation is the preferred method for eucalyptus oil produced in large quantities. The steam produced in a boiler is introduced into a vessel which contains the leaves and water. The leaves are located on a grid placed at a certain distance above the level of the water which fills the bottom of the vessel. The water is vaporized indirectly by steam

flowing in a pipe coil submerged by the water. The water vapor plus the distilled oil coming from the evaporator vessel is recovered in a separate water cooled condenser.

123-9 The mixture flowing out of the condenser is separated by decantation in a Florentine flask. The oil floats at the top and is easily separated. The distilled water still contains some soluble parts of the oil and therefore is sent back to the evaporator.

2.

Source of Technology

Different suppliers of machinery could be requested for their offer. For example, the following company is interested to supply the turn-key plant. B/R Instrument Corporation E-mail: br.service@brinstrument.com Fax. 4108208141 B. 1. ENGINEERING Machinery and Equipment

The list of machinery & equipment is indicated in Table 5.1. The total cost of the turnkey plant is estimated at Birr 3,742,200 of which Birr 3,.118,500 is required in foreign currency. Table 5.1 LIST OF MACHINERY Description 1 2 3 4 5 6 7 8 Evaporator vessel Condenser Florentine flask Steam boiler Pump (condensate) Pump (cooling water) Cooling tower Submersible pump Qty 6 3 3 1 1 1 1

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2.

Land, Building and Civil Work

The total area of the project is 2200 m2 of which 400 m2 is a built-up area. The cost of building is estimated at Birr 600,000. The lease value of land (at a rate of 1 Birr per m2 for 80 years) is about Birr 176,000.

3.

Location and Site

Gessachere town is selected as the best location for the project for its proximity to raw material sources.

VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The list of manpower and labor cost are indicated in Table 6.1. The total annual cost of labor is estimated at Birr 264,000. Table 6.1 MANPOWER REQUIREMENT & COST Manpower 1 2 3 4 5 6 7 8 9 General manager Secretary Accountant Production and technic head Mechanic Quality control Operators Ass. Operators Guards Sub total Benefits (25% BS) Grand total No. 1 1 1 1 1 1 6 3 3 18 Monthly Salary (Birr) 3000 800 2000 2500 1500 1500 4200 1200 900 17600 4400 22000 Annual Salary (Birr) 36,000 9600 24,000 30,000 18,000 18,000 50,400 14400 10800 211200 52800 264000

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B.

TRAINING REQUIREMENT

On-the-job training is carried out during plant erection and commissioning by the experts of machinery suppliers. The cost of training is estimated at Birr 30,000.

VII.

FINANCIAL ANALYSIS

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

Construction period Source of finance

1 year 30 % equity 70 % loan

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

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

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 5.80 million, of which 43 per cent will be required in foreign currency.

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

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Table 7.1 INITIAL INVESTMENT COST

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

Total Cost (000 Birr) 176.0 600.0 3,742.2 100.0 200.0 460.0 526.0 5,804.2 43

* N.B Pre-production expenditure includes interest during construction ( Birr 310.04 training (Birr 30 thousand ) and Birr 120

thousand )

thousand costs of registration, licensing and formation of

the company including legal fees, commissioning expenses, etc.

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 3.70 million (see Table 7.2). The material and utility cost accounts for 68.73 per cent, while repair and maintenance take 4.72 per cent of the production cost.

123-13 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

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

Cost 1,667.76 881.43 175 126.72 42.24 84.48 2,977.63 484.22 247.35 3,709.20

% 44.96 23.76 4.72 3.42 1.14 2.28 80.28 13.05 6.67 100

C.

FINANCIAL EVALUATION

1.

Profitability

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

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

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2.

Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at full capacity ( year 3) is estimated by using income statement projection.

BE =

Fixed Cost Sales Variable Cost

26 %

3.

Pay Back Period

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

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 27 % and the net present value at 8.5% discount rate is Birr 4.48 million.

D.

ECONOMIC BENEFITS

The project can create employment for 18 persons.

In addition to supply of the

domestic needs, the project will generate Birr 2.82 million in terms of tax revenue.

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