174. PROFILE ON PRODUCTION OF SPADES

AND SHOVELS

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TABLE OF CONTENTS

PAGE

I. SUMMARY 174-3

II. PRODUCT DESCRIPTION & APPLICATION 174-3

III. MARKET STUDY AND PLANT CAPACITY 174-4

A. MARKET STUDY 174-4

B. PLANT CAPACITY & PRODUCTION PROGRAMME 174-6

IV. MATERIALS AND INPUTS 174-7

A. RAW & AUXILIARY MATERIALS 174-7

B. UTILITIES 174-7

V. TECHNOLOGY & ENGINEERING 174-8

A. TECHNOLOGY 174-8

B. ENGINEERING 174-9

VI. MANPOWER & TRAINING REQUIREMENT 174-11

A. MANPOWER REQUIREMENT 174-11

B. TRAINING REQUIREMENT 174-12

VII. FINANCIAL ANALYSIS 174-12

A. TOTAL INITIAL INVESTMENT COST 174-12

B. PRODUCTION COST 174-13

C. FINANCIAL EVALUATION 174-14

D. ECONOMIC BENEFITS 174-15

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I. SUMMARY

This profile envisages the establishment of a plant for the production of spades and

shovels with a capacity of 1,200 tonnes per annum.

The present demand for the proposed product is estimated at 774 tonnes per annum.

The demand is expected to reach at 1,671 tonnes by the year 2017.

The plant will create employment opportunities for 56 persons.

The total investment requirement is estimated at Birr 5.39 million, out of which Birr

1.84 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 4.16 million, discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

A spade is a tool designed primarily for the purpose of digging or removing earth. In

gardening, a spade is a hand tool used to dig or loosen ground, or break up clumps in the

soil. Spades are made in many shapes and sizes, for a variety of different functions and

jobs. There are many different designs used in spade manufacturing. The most common

spade is a garden spade, which typically has a long handle, is wide, and is treaded (has

rest of the feet to drive the spade in to the ground).

A shovel is a tool for lifting and moving loose material such as coal, gravel, snow, soil, or

sand. It is usually a hand tool consisting of a broad blade with edges or sides that is fixed

to a medium-length handle. The term “shovel” is also applied to larger excavating

machines, such as steam shovels, which are designed for the same purpose-lifting and

moving materials.

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Generally, both spade and shovel have similar applications such as clearing irrigation

ditches, transferring sandy, light to heavy soil and materials, creating defined borders

along gardens, walks and drives in all soil types and digging holes to plant flowers and

seeds.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

A spade is a broad flat blade with a sharp lower age hand tool used to dig or loosen the

ground or removing earth. Spades are made from many shapes and sizes for a variety of

different functions and jobs. The most common type of spade is the garden spade which

has a long handle, is wide and is treaded. A shovel is similar hand tool used to move

loose material like sand, soil gravel, etc.

The supply of spades and shovels is met through both domestic supply and import. The

stagnant nature of most manufacturing enterprises in the country in the past and the

absence of investment in new technology encouraged imported products to dominate the

market in shovels and spades.

Imported shovels and spades are presented in Table 3.1.

Kotebe Hand Tools Factory is the leading domestic producer and according to dealers of

the product the domestic supply covers about 15% of the total supply.

The average import of shovels and spades in the last ten years was 353 tonnes, the first

six years average being 183 and the latest four years average being 609 tonnes. As can

be seen from the table, imported supply stepped up in the last four years.

The current effective demand is therefore estimated based on the last four years average

and an annual growth rate of 8% which was achieved in 2005/6. Thus, the current

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effective demand for spades and shovels is estimated at 774 tonnes of which 658 tons is

imported shovels and spades.

Table 3.1

IMPORTED SPADES AND SHOVELS (TONNES)

Year Import

1997 155.3

1998 87.1

1999 200.6

2000 165.2

2001 214.6

2002 277.5

2003 406.3

2004 870.0

2005 558.2

2006 600.5

Source: Customs Authority.

2. Projected Demand

The demand for spades and shovels increases with agricultural, construction and

gardening practices. The demand in the next ten years is estimated based on 2005-6

annual growth rate of imported spades and shovels. Accordingly, the demand is expected

to reach at 1,671 tonnes by the year 2017. Projected demand is presented in Table 3.2.

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Table 3.2

PROJECTED DEMAND FOR SHOVELS AND SPADES (TONNES)

Year Projected Demand

2008 836

2009 903

2010 975

2011 1,053

2012 1,137

2013 1,228

2014 1,326

2015 1,433

2016 1,547

2017 1,671

3. Pricing and Distribution

The retail price of a Chinese shovel is Birr 15. The recommended price for the new

project is Birr 10. The product will find its outlet through the existing wholesale channel.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

According to the market study above, the envisaged plant will have a capacity of 1,200

tonnes of spade and shovels per year. The plant will operate single shift of eight hours a

day and 300 days per annum.

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2. Production Programme

The plant is intended starting production at 70% of installed capacity in the first year. It

will then raise its capacity to 85% in the second year, and finally to 100% in year three

and thereafter.

IV. MATERIALS AND INPUT

A. RAW AND AUXILIARY MATERIALS

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

plate.

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

Table 4.1

RAW AND AUXILIARY MATERIALS REQUIREMENT AT FULL CAPACITY

OPERATIONS

Total cost ('000 Birr) Sr.

No. Description

Qty.

(tones)

Unit cost

('000

Birr) FC LC Total

2 Medium Steel Plate 3-10mm 1,320 4.23 5,583.60 1,116.72 6,700.32

3 Miscellaneous materials L.S - - 375.00 375.00

Total 5,583.60 1,491.72 7,075.32

B. UTILITIES

Inputs required by the plant consist of electricity, water and oil. Electricity is required for

supplying power to all production equipment, and also to power sockets, lighting system

and other auxiliary equipment of the plant.

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For the plant operating single shift of eight hours a day, and 300 days a year, the total

annual electrical energy requirement will be 175,000 kWhs. The annual electricity bill

will then be Birr 82,880.

Water is required for cleaning, drinking and general purpose. The annual water

requirement is estimated at 1,000m3, and oil is used for hardening of the tip of the shovel

(quenching), the annual requirement for oil is 1m3 and the corresponding expenditure is

Birr 10,000 and birr 7,200, respectively.-.

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

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

The manufacturing process for the production of spades and shovels comprises design the

shape and blanking the steel plate to the desired shape. A shovel often has a very wide

sidles blade that curves upward attached to a long, straight handle. It is designed as much

for pushing the soil as for lifting it. A spade is designed primarily for breaking up

(“spading”) clumps of soil with foot. Spade blades usually have rounded face without

sharply upturned sides.

The highest quality spade and shovel blade is made by heating the blanked plate of steel

and hammering it into a form that provided a blade appropriately thin, and as the blade

progressed back towards the handle, it could be made thicker to give the blade the

amount of stiffness and strength required in the use of the spade and shovel.

Further, to economize on the manufacturing operation, the original blank of the stamped

blade includes a projection which when rolled into a circle provides a socket for the

spade and shovel handle.

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Originally, emanating from the center of the back or rear edge of the shovel blade, is a

tang (as opposed to a socket) similar to the tangs commonly used today in rakes and hoes.

2. Source of Technology

The machinery and equipment required can be obtained from the following companies.

SHANDONG WEICHAI IMP.& EXP.CORP.

NO.6A,SIPING Rd.,KUIWEN DISTRICT,

WEIFANG, SHANDONG, P.R. OF CHINA

Tel +8269988

Fax: +86-536-8232079/8262666

B. ENGINEERING

1. Machinery and Equipment

Plant machinery and equipment required for spade and shovel plant is presented in table

5.1. The total investment cost of plant machinery and equipment is estimated at Birr1.85

million.

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Table 5.1

LIST OF MACHINERY AND EQUIPMENT FOR OIL PRESSING

MACHINE PLANT

Cost (Birr)’000 Sr.

No. Description Qty.

LC FC Total

1 Heavy duty lathe 7’ 1 45.643 228.214 273.857

2 Lathe machine 8’ 1 38.036 190.179 228.215

3 Shaping machine 24’ 1 35.500 177.500 213.00

4 Heavy duty lathe 5’ 1 25.357 126.786 152.143

5 Electric grinder 8” 3 7.608 38.034 45.642

6 Pillar drill ¾ 2 10.143 50.714 60.857

7 Pillar drill 1½ 1 12.679 63.393 76.072

8 Slotting machine 7½ 2 25.357 126.786 152.143

9 Welding machine 3 15.214 76.071 91.285

10 Hack saw machine 2 10.000 50.000 60.000

11 Hand drill 2 5.071 25.357 30.428

12 Vice 4 8.918 35.670 44.588

13 Furnace 1 68.750 275.00 343.75

14 Tools, gauges, jigs & fitures L.S - 75.000 75.000

Total 308.276 1,538.707 1,846.98

2. Land, Building and Civil Works

The envisaged plant will require a total land area of 1,000m2. The total land lease value

for 80 years at the rate of Birr 0.40 per m2 is therefore Birr 32,000. The floor space

required for the building of and other facilities will be about 750m2. The total estimated

cost of building and civil works at the rate of Birr 2,000 per m2 is about Birr 1.5 million.

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

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3. Proposed Location

Location of an industrial plant is determined on the basis of the proximity to the market

for final products. The plant is proposed to locate at Yirga Chefe Woreda in Yirga Chefe

town. This is advantageous since infrastructures like electricity, water; transportation and

communication are available.

VI. MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower list and the corresponding monthly and annual salaries are given in Table

6.1 below.

Table 6.1

MANPOWER REQUIREMENT AND ANNUAL SALARY COST

Salary (Birr) Sr. No. Description Req.No. Monthly Annual

A. Administration 1 Plant Manager 1 2,000 24,000

2 Head, Finance & Administration Department 1 1,600 19,200

3 Head, Production and Technical Department 1 1,600 19,200

4 Secretary 1 850 10,2005 Accountant 1 1,000 12,0006 Salesman 1 800 9,6007 Clerk 1 600 7,2008 Cashier 1 650 7,8009 General Service 3 250 9,000

Sub-Total 11 118,200B. Production

13 Forman 1 1,200 14,40014 Machinery Operators 17 650 132,00015 Assistant Operators 10 450 54,00015 Mechanics 2 800 19,20017 Laborers 6 250 18,000

Sub-Total 45 - 237,600Employee's Benefit (25% Of Basic Salary) - - 88,950

Total 56 - 444,750

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B. TRAINING REQUIREMENT

The machine operators and mechanics need at least two weeks training on the technology

and maintenance. For the rest, on-the-job training will be sufficient on the start up period

by the specialists. Total training cost is estimated at Birr 35,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the spades and shovels project is based on the data presented in

the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity

70 % loan

Tax holidays 5 years

Bank interest 8%

Discount cash flow 8.5%

Accounts receivable 30 days

Raw material local 30 days

Raw material, import 90 days

Work in progress 2 days

Finished products 30 days

Cash in hand 5 days

Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr

5.39 million, of which 41 per cent will be required in foreign currency.

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

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Table 7.1

INITIAL INVESTMENT COST

Sr. Total Cost

No. Cost Items (‘000 Birr)

1 Land lease value 32.0

2 Building and Civil Work 1,500.0

3 Plant Machinery and Equipment 1,847.0

4 Office Furniture and Equipment 100.0

5 Vehicle 200.0

6 Pre-production Expenditure* 390.9

7 Working Capital 1,329.4

Total Investment cost 5,399.2

Foreign Share 41

* N.B Pre-production expenditure includes interest during construction ( Birr 240.90 thousand ) training

(Birr 35 thousand ) and Birr 115 thousand costs of registration, licensing and formation of the company

including legal fees, commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 8.40

million (see Table 7.2). The material and utility cost accounts for 85.37 per cent, while

repair and maintenance take 0.89 per cent of the production cost.

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Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %

Raw Material and Inputs 7,075.32 84.18

Utilities 100.08 1.19

Maintenance and repair 75 0.89

Labour direct 266.85 3.17

Factory overheads 88.95 1.06

Administration Costs 266.85 3.17

Total Operating Costs 7,873.05 93.67

Depreciation 339.7 4.04

Cost of Finance 192.19 2.29

Total Production Cost 8,404.94 100

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 = 40 %

Sales – Variable Cost

3. Pay Back Period

The investment cost and income statement projection are used to project the pay-back

period. The project’s initial investment will be fully recovered within 4 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 27 % and the net

present value at 8.5% discount rate is Birr 4.16 million.

D. ECONOMIC BENEFITS

The project can create employment for 56 persons. In addition to supply of the

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

establishment of such factory will have a foreign exchange saving effect to the country by

substituting the current imports.