194. PROFILE ON PRODUCTION OF GASKET AND WASHER 194-2 TABLE OF CONTENTS PAGE I. SUMMARY 194-3 II. PRODUCT DESCRIPTION & APPLICATION 194-3 III. MARKET STUDY AND PLANT CAPACITY 194-4 A. MARKET STUDY 194-4 B. PLANT CAPACITY & PRODUCTION PROGRAMME 194-7 IV. RAW MATERIALS AND INPUTS 194-7 A. RAW & AUXILIARY MATERIALS 194-7 B. UTILITIES 194-8 V. TECHNOLOGY & ENGINEERING 194-8 A. TECHNOLOGY 194-8 B. ENGINEERING 194-9 VI. MANPOWER & TRAINING REQUIREMENT 194-12 A. MANPOWER REQUIREMENT 194-12 B. TRAINING REQUIREMENT 194-13 VII. FINANCIAL ANALYSIS 194-13 A. TOTAL INITIAL INVESTMENT COST 194-13 B. PRODUCTION COST 194-14 C. FINANCIAL EVALUATION 194-15 D. ECONOMIC BENEFITS 194-16 194-3 I. SUMMARY This profile envisages the establishment of a plant for the production of gasket and washers with a capacity of 445 tonnes of gasket and 75 tonnes of washer per annum. The present demand for the proposed product is estimated at 300 tonnes for gasket and 52 tonnes for washer per annum. The demand is expected to reach at 590 tonnes for gasket and 98 tonnes for washer by the year 2017. The plant will create employment opportunities for 56 persons. The total investment requirement is estimated at about Birr 4.91 million, out of which Birr 1.68 million is required for plant and machinery. The project is financially viable with an internal rate of return (IRR) of 23 % and a net present value (NPV) of Birr 4.68 million discounted at 8.5%. II. PRODUCT DESCRIPTION AND APPLICATION A gasket is a mechanical seal that fills the space between two objects, generally to prevent leakage between the two objects while under compression. Gaskets save money by allowing less precise mating surfaces on machine parts which can use a gasket to fill irregularities. One of the more desirable properties of an effective gasket in industrial applications for compressed fiber gasket material is the ability to withstand high compressive loads. Most industrial gasket applications involve bolts exerting compression well into the 14 MPa (2000 psi) range or higher. 194-4 A washer is a thin plate (typically disk-shaped) with a hole (typically in the middle) that is normally used to distribute the load of a threaded fastener. Other uses are as a spacer, spring (Belleville, wave washers), wear pad, preload indicating device, and locking device. Washers are usually metal or plastic. High quality cap screws require hardened steel washers to prevent the loss of pre-load after the torque is applied (due to Brinelling). Gaskets used in taps to stop the flow of water are sometimes referred to colloquially as washers; while they may look similar, however, washers and gaskets are usually made differently and designed for different functions. Most of the raw materials required for production of gasket and washer have to be imported. However, there is an established domestic market for the product as evidenced by the quantity of the product annually imported. Therefore, the envisaged project is aimed at substituting the current import. III. MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY 1. Past Supply and Present Demand The current demand for both gaskets and washers is met mainly through import. Although it is believed that there is some amount of local production the data could not be found in the manufacturing industries survey conducted by CSA. As a result the import data has been analyzed to estimate the unsatisfied demand for the products. Import of gaskets and washers of metal and copper (excluding made of rubber and natural cork) is given in Table 3.1 194-5 Table 3.1 IMPORT OF GASKETS AND WASHERS ( TON) Year Gaskets Washers 2001 1024.9 22.9 2002 98.6 32.1 2003 136.9 39.6 2004 245.2 56.8 2005 127.4 52.4 2006 160.4 46.0 Source: Customs Authority. As could be seen from Table 3.1 import of gaskets is highly erratic. On the other hand the import data for washers generally shows an increasing trend. In order to estimate the current demand for gaskets and washer two different approaches are utilized. Since the import data for gaskets is highly erratic the average of the past six years is considered to reflect the current demand. Accordingly current demand for gaskets is estimated at about 300 tons. With respect to washers the general trend has been positive. Hence by looking to the recent three years import data current effective demand is estimated at 52 tons. 2. Demand Projection The demand for gaskets and washers is influenced by many factors due to their wide application. Gaskets are one used a seal in pressure vessel, between cylinder head and cylinder block of automobile engine, in cluch. starting piston, breaks etc. Washers are used in joints (bolts and nuts) or assemblies of insure tightness. Therefore, the demand for the product generally will grow parallel with the growth of the economy. Considering the GDP growth achieved in the past few year annual growth rate of 7% is considered in forecasting the unsatisfied demand for the products (see Table 3.2.). 194-6 Table 3.2 FORECASTED DEMAND FOR GASKETS & WASHERS Quantity ( Ton.) Year Gaskets Washers 2008 321 54 2009 343 57 2010 368 61 2011 393 66 2012 421 70 2013 450 75 2014 482 80 2015 515 86 2016 551 92 2017 590 98 Demand for gaskets will grow form 321 tons in the year 2008 to 368 tons and 515 tons by the year 2010 and 2015 respectively. Similarly the demand for washer will increase from 54 tons in the year 2008 to 61 tons and 86 tons by the year 2010 and 2015 respectively. 3. Pricing and distribution Based on the average import price a factory gate price of Birr 8,000 per ton of gasket and Birr 3,000 per ton of washers is recommended. 194-7 B. PLANT CAPACITY AND PRODUCTION PROGRAMME 1. Plant Capacity According to the market study above, the envisaged plant will have a capacity of 445 and 75 tones of gaskets and washers respectively. The plant will operate single shift of eight hours a day and 300 days per annum. 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 gasket and washer is asbestos sheet and mild steel sheet respectively. Except for packing material all the raw materials required have to be imported. Annual requirement of raw and auxiliary materials is shown in Table 4.1. TABLE 4.1 RAW MATERIALS REQUIREMENT AT FULL CAPACITY OPERATIONS Sr. Qty. Unit cost Total cost ('000 Birr) Description No. (tones) ('000 Birr) FC LC Total 1 Asbestos Sheet 580 1.50 870.00 217.50 1087.50 2 Mild Steel Sheets 120 5.83 699.60 174.90 874.50 3 Packing materials L.S 1.75 - 25.00 25.00 1,569.6 1,987.00 TOTAL 417.40 0 194-8 B. UTILITIES Inputs required by the plant consist of electricity, and water. Electricity is required for supplying power to all production equipment, and also to power sockets, lighting system and other auxiliary equipment of the plant. For the plant operating single shift of eight hours a day, and 300 days a year, the total annual electrical energy requirement will be 30,000 Kwhs. The annual electricity bill will then be Birr 14,208.-. Water is required for cleaning, drinking and general purpose. The annual water 3 requirement is estimated at 1,000m , and the corresponding expenditure is Birr 10,000.-. Thus, the total annual cost of utilities is estimated at about Birr 24,208.-. V. TECHNOLOGY AND ENGINEERING A. TECHNOLOGY 1. Process Description The manufacturing process for the production of gasket comprises design the shape and cutting the asbestos sheet to the desired shape. It is usually desirable that the gasket be made from a material that is to some degree compressible such that it tightly fills the space it is designed for, including any slight irregularities. Then the finished product is inspected and packed. The commercial washers are usually punched out from sheets in larger size and the blanks coming out are used again for the manufacturing of smaller sizes of washers. Dies and punches are used on presses for the manufacture of washers. Finally after inspection, it will be packed. 194-9 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 gasket and washer plant is presented in table 5.1. The total cost of plant machinery and equipment is estimated at Birr 1.68 million. Out of which Birr 1.35 million will be required in foreign currency. 194-10 Table 5.1 LIST OF MACHINERY AND EQUIPMENT FOR GASKET AND WASHER PLANT Sr. Description Qty. No. Automatic double stroke solid die cold heading 1 1 machine capacity ǿ8-12mm Automatic double stroke solid die cold heading 2 1 machine capacity ǿ6-8mm Automatic bolt head trimming & shank 3 3 reducing machine capacity ǿ6-8mm. Automatic bolt head trimming & shank 4 4 reducing machine capacity ǿ8-12mm. Automatic thread rolling machine capacity ǿ6- 5 1` 8mm. Automatic thread rolling machine capacity ǿ8- 6 1 12mm. Automatic nut cutting machine capacity ǿ6- 7 1 8mm. Automatic nut cutting machine capacity ǿ8- 8 1 12mm. Automatic nut tapping machine capacity ǿ6- 9 1 8mm Automatic nut tapping machine capacity ǿ8- 10 1 12mm 11 Polishing Barrel 3 12 Inspection Gauges 1 Set 13 Standard working tools& handling equipment 1 Set 14 Center lathe between center distance 1000mm 1 15 Pillar type drilling machine capacity ǿ20mm 1 16 Surface grinder 1 17 Mechanical scraper 1 18 Pickling tanks 1 Set 19 Zinc plating plant 1 Set 194-11 2. Land, Building and Civil Works The envisaged plant will require a total land area of 1,500m2. The total land lease value for 80 years at the rate of Birr 0.4967 per m2 is therefore Birr 59,604. The floor space required for the building of and other facilities will be about 800m2. The total estimated cost of building and civil works at the rate of Birr 2,000 per m2 is about Birr 1.60 million. Therefore, the total cost of land, building and civil works is estimated at Birr 1,659,604. 3. Proposed Location Selection of a location for a manufacturing plant depends on the comparative advantages of a location vis a vis the plant’s requirement. Regarding dairy equipment manufactering, the major raw material required have to be imported and a manufacturing enterprise that has to import raw materials required such prefer location which is near to port or that has easy access to port. Moreover, availability of infrastructures such as power and nearness or easy accesses to major markets is also additional critical factors. Accordingly, due to the availability of the following facilities; Road net work that connect to major towns within the region and other regions Availability of Infrastructure such as power and water Communication facilities ( telephone, fax, internet, etc.) Relatively large market Mesekan, Kebena and Aleta woredas are selected as a possible location for the envisaged plant. Moreover, after analysing the comparative advantages and disadvantages of the selected woredas and the requirements of the envisaged project the capital of Kebena woreda i.e. Wolkite town is selected as the best location. 194-12 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 LIST OF MANPOWER REQUIREMENT AND ANNUAL SALARY Salary (Birr) Sr. No. Description 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 10,200 5 Accountant 1 1,000 12,000 6 Salesman 1 800 9,600 7 Clerk 1 600 7,200 8 Cashier 1 650 7,800 9 General Service 3 250 9,000 SUB TOTAL 11 118,200 B. PRODUCTION 13 Forman 1 1,200 14,400 14 Machinery Operators 22 650 171,600 15 Assistant Operators 15 450 81,000 15 Mechanics 2 800 19,200 16 Quality controller 1 600 14,400 17 Laborers 4 200 9,600 SUB TOTAL 45 - 309,600 EMPLOYEE'S BENEFIT (25% OF BASIC SALARY) - - 106,950 TOTAL 56 - 534,750 194-13 B. TRAINING REQUIREMENT The machine operators, mechanics and quality control worker need at least two weeks training on the technology, maintenance and quality control. For the rest, on-the-job training will be sufficient on the start up period by the specialists. Total training cost is estimated at about 45,000 Birr. VII. FINANCIAL ANALYSIS The financial analysis of the gasket and washer 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 3 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 4.91 million, of which 56 per cent will be required in foreign currency. The major breakdown of the total initial investment cost is shown in Table 7.1. 194-14 Table 7.1 INITIAL INVESTMENT COST Sr. Total Cost No. Cost Items (‘000 Birr) 1 Land lease value 59.6 2 Building and Civil Work 1,600.0 3 Plant Machinery and Equipment 1,681.3 4 Office Furniture and Equipment 125.0 5 Vehicle 660.0 6 Pre-production Expenditure* 422.3 7 Working Capital 364.1 Total Investment cost 4,912.3 Foreign Share 56 * N.B Pre-production expenditure includes interest during construction ( Birr 272.34 thousand ) training (Birr 45 thousand ) and Birr 105 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 2.93 million (see Table 7.2). The material and utility cost accounts for 68.49 per cent, while repair and maintenance take 2.38 per cent of the production cost. 194-15 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR) Items Cost % Raw Material and Inputs 1,987.00 67.67 Utilities 24.21 0.82 Maintenance and repair 70 2.38 Labour direct 185.76 6.33 Factory overheads 61.92 2.11 Administration Costs 123.84 4.22 Total Operating Costs 2,452.73 83.53 Depreciation 293.61 10.00 Cost of Finance 190.01 6.47 Total Production Cost 2,936.35 100 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. 194-16 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 = 21 % 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 5 years. 4. Internal Rate of Return and Net Present Value Based on the cash flow statement, the calculated IRR of the project is 23% and the net present value at 8.5% discount rate is Birr 4.68 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 2.04 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.