The significant growth of global trade in recent years has led to higher demand for transportation of products and material which results in higher demand for protective heavy duty shipping sacks (HDSS).
With the high demand for HDSS in the petrochemical industry, the Middle East has turned into a lucrative market place. Comprehensive assessments for the viability of manufacturing HDSS in the UAE, Process, Raw Material, Human Resources, Machinery & Equipment, Construction, Required Capital for this purpose, Break Even Analysis and Profitability evaluation of such manufacturing plant have been reviewed an analyzed.
Financial analysis results such as Return on Investment and Internal rate of Return that persuaded on the provisional 6 years Profit & Loss and Cash flow statement of this production plant, along with other advantages, set manufacturing of HDSS in the UAE feasible and profitable.
1. Introduction
The increase in the supply of food and chemical products in the Middle East has resulted in a high demand for effective packaging solutions. However, as of today, few companies have invested in quality automatic effective Form Fill and Seal machines for packaging of dry free-flowing products such as pigments, fertiliser, salt, quartz sand and animal fish fodder. In order to produce and deliver high grade heavy duty shipping sacks with extreme impact strength, excellent seal ability and impressive glossy appearance, modern packaging operations require good quality films. These products are manufactured with ingredients developed to stand up to the harsh elements of outside storage, good sealing, toughness, rigidity, hot content capability and shape retention.
The heavy-duty sack industry has been showing some changes based on the prices of raw materials as well as the production technologies. The effect of those variables will determine the growth of this sector in the near future. Heavy-duty sacks, with thicknesses between 110 to 180 microns, are used to transport bulky materials from one place to another and are designed to carry products weighing more than 10 kg (22 lb) to 50 kg (110 lb).
The market size alone in the Gulf Cooperation Council (GCC) was estimated to be 100,000 MT for 2006 and 335,000 MT for 2010, with an average annual growth rate of 50%. Very important in the growth of the market are the price changes for the raw materials and the development of new technologies and structures.
2. Applications
Very often the products packaged in the HDSS are bulky and heavy. A typical application is to package raw materials, including plastic resins in pellet or powder form such as Polyethylene (PE), polypropylene (PP), polystyrene, and chemical products such as sulphur. Also using this type of packaging are food items such as salt and sugar and items including pet food, sand, de-icing salt, fertilizers, and potting soil, among others. A common weight for a filled sack of these applications is 25 kg (55 lb).
Common application of HDSS in different industries is illustrated on the table 1.
Industry
Form
Product
Chemical
Granular
Polymers
Master batches
Caustic soda
Chemicals
Powder
Polymers
Pigments
Salt
Hazardous goods
Sand
Metallic powder
Minerals
Agriculture
Granular
Powder
Fertiliser
Peat and soil
Seeds
Food
Granular
Pet food
Fish fodder
Animal fodder
Table 1- HDSS Applications
3. Determining the Product Specifications
The product specifications will be determined by the film's mechanical properties, physical properties, behaviour expected once the sack is stored, and dimensional requirements.
The tensile properties of the film must resist the forces and loads during the filling operation, plus the loads resulting from handling and storage. The following aspects must be considered during sack design to achieve the properties needed:
� Product weight and temperature at time of filling
� Type of filling system
� Handling and storage conditions
� Seal type at the bottom and top of the sack.
The weight of the product being packaged is extremely important for the design. Normal thickness for weights around 10-15 Kg (Approx 20-30 lb) is 96.5 or 100 microns (3.8 or 4.0 mils). If the contents' weight is around 25 kg (50 lb), which is the case of resin sacks, the thickness goes between 140-180 microns (5.5-7 mils). New materials and technologies are allowing thicknesses to be reduced to about 120 microns. Also very important is the sack's resistance to the load occurring in storage. Due to the methods used to store or palletize the sacks, sometimes they must resist 10 or even 20 times the weight of the product packaged.
As a consequence, the sack must be rigid enough to avoid deformation in the transversal direction. This problem becomes more critical when the temperatures in the storage place are higher than 30 deg C (87 deg F). The resin selection for the film structure must consider this problem as well.
The air used to transport and feed the material tends to inflate the sack. As a result, the film must be rigid enough to avoid deformations and thickness reduction. Small perforations in the film could be used to help in the air evacuation without deteriorating the film properties.
Tear resistance of the film is very important because of increased risk of puncture and damage to the sack in the storage place and during transport. The integrity of the sack under critical conditions such as pressure, impact, and mishandling is guaranteed by good sealing properties. Although impact could occur during transport and handling, more important is the resistance to the impact generated when the sack falls from heights around 2.5 meter (9 ft) or more at the storage place.
The film's slipping characteristics are very important for this application. The sack should have a high Coefficient of Friction (COF) on the outside to prevent sack slippage once it is palletized. Some modifications to the film surface can be made to increase the COF, including embossing or by introducing additives into the resin.
Also important is the ability to print the product description and manufacturer information on the sack surface. The sack requires a surface treatment to permit a good ink adhesion, and the inks must have abrasion resistance.
Dimensional requirements must be considered, including method of transportation, common dimensions of the pallets, and number of units per pallet to ensure good pallet stability and reduction of the slippage risk.
4. Production Process
Plastic film production consists of the mixing of Polyolefin resins together with pigment or additive masterbatches that are converted into films on rolls.
4.1. Polyolefins
Polyolefins are the most widely used materials for the manufacture of films. The film producer can choose from a large variety of polyolefins types to meet the end user requirements for price and performance. Those polyolefins have the following attributes:
� Density: density range, effect of density
� Melt Flow Index: effect of MFI
� Molecular weight distribution
Polymers with Narrow Molecular Weight Distributions show lower melt strength. They generally have greater stress cracking resistance and better optical properties. LDPE, LLDPE, their blends, and HDPE are used for the majority of applications.
4.2. Extrusion Process
The first phase of film production is the extrusion process. The extruder is commonly defined by the diameter and the length/diameter ratio (L/D) of the screw. Its design depends on the type of polymer being processed.
Figure 1- Extrusion components
4.3 Blown Film Extrusion
Film blowing is the most commonly used technique. About 90% of all polyethylene films are manufactured on blown film lines. The polymer melt stream coming out of the extruder is shaped into a tubular blowing head (tubular die).
Figure 2- Blown Film Extrusion Components
1. Extruder
2. Tubular Die
3. Film Sizing Unit
4. Haul-Off Unit
5. Winder
Bubble Cooling: Bubble cooling occurs when air emerges from the cooling ring (mounted directly on the die outlet), which cools down the external surface of the bubble. The volume, speed, temperature of air, as well as the direction of air stream, determines the rate of cooling. Superior cooling performance is achieved when internal cooling is also used: an air exchange system "inside" the bubble brings in fresh air and removes internal air (as well as volatiles) from inside the bubble. This Internal Bubble Cooling (IBC) system significantly increases the throughput of the blown film line.
Film Sizing System: The bubble is then calibrated in a Film Sizing System. The sizing system scans the bubble with a sensitive contact device. The internal pressure is held constant so that the dimension of the bubble remains uniform.
Haul-Off Unit: At its upper end, the bubble is gradually flattened by collapsing frames and then guided to a nip roll assembly. Some lines have oscillating haul-off units to minimize the thickness variability in the final roll of film. This offers an alternative to the use of rotating dies.
Winding Unit: The film is then tightly wound on a cardboard tube (called a core).
4.4. Co-extrusion
Co-extrusion is used in the production of multilayer films; it combines more than one layer with different materials and thicknesses. The main reason for co-extrusion is to take advantage (in one film) of the desirable properties of the individual components or film layers.
Blown film Co-extrusion is the preferred process to produce heavy-duty sacks. Tear strength and the impact resistance of this type of film are far superior than cast extruded film. The estimated market share for monolayer films is approximately 55% versus 45% for coextruded structures. Co-extrusion allows more material combinations, special effects on the outside surface, and downgauging.
4.5. Conversion into Final Product
Once the tubing or the single sheet is produced, it needs to be converted into the final sack. This requires printing process to print customers� markings and bag specification as per customer requirements on the bags. On the other hand palletizing and stack-ability of the bags must be enhanced to prevent slippage in shipping and storage by side gusseting and embossing the surface of the sacks.
Tubular gusseted and embossed roll is produced specifically for Form Fill Seal machines. This type of film is more popular in GCC and Europe where there is a trend toward using automatic filling machines running at speeds of 2,000 sacks per hour.
5. Material
The traditional materials used for the production of heavy-duty sacks are PE including Low Density (LD), linear Low Density (LLD), and High Density (HD). Depending on the final application and the mechanical properties required, LLDPE is used alone or in blends with the other materials. Butene LLDPE, among the different LLDPE types available, is used most widely due to the balance between price and properties obtained.
LLDPE provides very good tear resistance, sealing properties, and puncture resistance. When it is blended with LDPE and HDPE, a typical blending ratio is 60%-75% LLDPE and 20-15% LDPE and 20-15% HDPE. It is important to select the appropriate LLDPE grade, because too much flexibility will be detrimental to the dimensional stability of the sack under load and temperatures.
Alternatively, LLDPE can be the major component. Fractional melt resins such as LDPE help with bubble stability, have better melt strength, and provide a better impact resistance to the film. Typical melt index values for LDPE are better around 0.25-0.8 g/10 min. Melt index values for LLDPE generally are around 0.5-1.5 g/10 min.
6. Machinery & Equipments
Production of HDSS requires Co-extrusion 3-layer Polyethylene machinery. Co-extrusion machinery provide possibility of mixing different PE grades with different characteristic to make a composition of material to enhance the performance of the film for Heavy Duty applications.
After performing competitor analysis and studying machinery suppliers, four advanced European suppliers have been nominated to supply required machinery. Technology, efficiency, output, delivery period and price of the machinery from each supplier listed and according ranked.
Blown Film Extrusion Machine
X
Y
Z
W
Rank
4
3
2
1
Width (mm)
400-1000
400-1000
400-1000
400-1000
Thickness (micron)
100-250
100-250
100-250
100-250
Max Output (Kg/h)
220
250
250
320
Power consumption (KW/Kg)
1
1.1
1
1
Delivery Time
7 months
6 months
6 months
7 months
Price (USD)
4,885,000
5,400,000
5,450,000
5,060,000
Table 2- Blown Film Extrusion Machine Price Comparison
Printing & Converting Machine
X
Y
Z
W
Rank
4
2
3
1
Width (mm)
1000
1000
1000
Thickness (micron)
100-250
100-250
100-250
Max Output (Meter/min)
250
250
250
Power consumption (KW/Kg)
0.2
0.2
0.2
Delivery Time
4 months
4 months
4months
Price (USD)
995,900
1,220,000
995,900
Table 3- Printing & Converting Machine Price Comparison
Machinery supplier W could be the best choice due to advanced technology and high output and reasonable price. Delivery time is also negotiable to be reduced down to 6 months yet in view of the length of construction phase which is considered to be 8 months. Hence, machinery delivery time will perfectly fit to the project schedule. Supplier W is also capable to supply the Printing & Converting machine with advanced technology and synchronised with its Blown Film Extrusion line and last but not least reasonable price.
6.1 Production Machinery Cost
Total required machinery costs which is including of 3 Extrusion line and 1 printing and Converting machine, costs AED 16,175,900.
Table 4- Production machinery Cost
Machinery
Price/unit
Qty
Cost
Three-layer Blown Film Machine
5,060,000
3
15,180,000
Printing & Converting Machine
995,900
1
995,900
16,175,900
7. Human Resources
Production of HDSS requires experienced operators and engineers who are familiar with the machinery and operation.
For the calculation of the cost of Human resource of for HDSS Production plant, manpower categorized in three levels;
� Overhead labor such as CEO, Sales Managers, Admin Executives, Secretaries and drivers.
� Indirect labor such as Engineers, Purchasing.
� Direct labor such as technicians, operators, supervisors and helpers.
Following conditions has been considered for Annul Manpower cost
� The policies are based on UAE labor law.
� Overhead labor to get fix amount of basic and allowance salary with no over time.
� Indirect labor to get basic & allowance plus applicable overtime at the rate of 25% of hour based salary. Over time not to exceed 12 hours per week.
� Direct labor to get basic & allowance wage plus applicable overtime at 25% of hour based salary. Overtime not to exceed 30 hours per week.
Total required Manpower to run the plant 24/7 and total salary is listed in the table 5.
Table 5- Required Manpower and Salary
Position
Basic
Allowance
Basic/h
Max Overtime (Hour)
Overtime Salary
Annual Salary
Number
Total
CEO
18,000
8,000
312,000
1
312,000
Manager
7,000
4,000
132,000
2
264,000
Executive
4,200
2,800
84,000
1
84,000
Procurement
4,200
2,800
20
12
303
87,635
1
87,635
Engineer
4,200
2,800
20
12
303
87,635
1
87,635
Technician
2,160
1,440
10
30
389
47,873
2
95,746
Worker
1,800
1,200
9
30
325
39,894
14
558,519
22
1,489,535
8. Raw Materials and availability
Aside from state of the art machinery, the production of HDSS requires high quality raw material which is readily available in the GCC. Borouge Petrochemical Company (Abu Dhabi), which produces Polyethylene (PE) with bimodal technology with annual capacity of 800,000 MT, has been targeted as one of the key suppliers. In addition, Sabic (KSA) and Qapco (Qatar) are other two suppliers which produce PE grades for production of HDSS. Other PE manufacturers in KSA and Kuwait may also act as future suppliers to cover possible future expansion plans.
Today in the market, Borouge LLDPE PE�s material combines excellent processing characteristics with final film toughness. Other key benefits of Borouge�s bimodal LLDPE for heavy-duty sacks include:
� Excellent combination of high impact and seal strength, thus reduces risk of package bursting during various stages of package life � from filling to transportation to end use
� Superior load retention and minimise deformation of package in use
� Material savings and lower costs
A typical blend for manufacturing HDSS in order to provide very good tear resistance, sealing properties, and puncture resistance is with a ratio of 60%-75% LLDPE and 20-15% LDPE and 20-15% HDPE. Generally, LDPE has got higher price than LLDPE due to its power consumption during the process and HDPE is cheaper than LLDPE due to its normal characteristic with less value added in the overall quality.
Table 6 demonstrates annual consumption of each material and the overall cost for the first year of production total Raw Material cost calculated based on year 1 production capacity.
Table 6- Raw Material Consumption & Cost
Material
Price/Ton
Consumption
Year-1 Tonnage
Cost
LDPE
4,000
15%
578
2,886,354
LLDPE
4,784
70%
2,695
12,892,880
HDPE
3,600
15%
578
2,639,175
3,850
18,418,400
9. Civil Construction
The most suitable land size to be allocated for HDSS production plant should be 10,000 Sqm with 5,500 Sqm of covered building for factory building and warehouse. Other buildings such as Admin office, laboratory and utility room also must be considered. This project also requires other machineries and equipment such as Utility Installation, Handling & transportation equipments and Laboratory Equipments.
For such complicated project which requires close relationship between Owner, Design team and Contractors. Furthermore to accomplish the project within the budget and in the time fare with no major delay and due to small executive team of owner in initial stage, it has been recommended to utilize Agency Construction Management Contracting method. In this arrangement, the owner holds direct contractual relationship with both the design professional and the contractor, but also retains the services of an independent construction manager to coordinate between two other entities. Construction Management Agency also should prepare Bill of Quantity (BOQ) and schedule the project based on the Design and prepare a set of bidding documents for the prime contractors. Contractors also must be prequalified based on their past experience on the similar size complex projects and their resources. This provides assurance to the owner that there is some degree of assurance that all contractors� submitted bids are qualified and capable of successfully performing and they are bidding against relatively equal competitors.
The contract with Prime contractor must be at Fixed Price method using BOQ and fully developed specification as the source of required material with considering penalty for delay. This contract presents a low financial risk for the owner and the required investment level can be established at an early date.
However, the contract type with the Construction Management Agency should be Unit Price type which CMA defines its fixed unit price for the Time & Manpower which it spends on this specific project only.
Civil construction has been classified into three sub categories of Design & Drawings, Buildings Construction, and Utility Installation. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units.
9.1 Design & Drawings
For the preliminary phase of civil construction, a full design of factory layout and mechanical, electrical and plumbing design and drawing is required to be done by machinery supplier. The cost of Design is shown on table 7.
Table 7- Design & Drawings Cost
Description
Cost
Design
200,000
200,000
9.2 Buildings Construction
Construction of the buildings specified for this project including site preparation, factory building, office and laboratory, warehouse and utility room cost is shown in table 8.
Table 8- Building Construction Cost
Description
Area (m2)
Price / m2
Value
Site Preparation
10,000
18.4
184,000
Factory Building
4,000
120
480,000
Office Building
300
1,000
300,000
Laboratory
80
184
14,720
Ware house
1,500
120
180,000
Utility room
40
100
4,000
1,162,720
9.3. Utility Installation
The cost of utility installation and required mechanical, electrical and plumbing is shown on table 9.
Table 9- Utility Installation Cost
Description
Cost
MEP
895,000
Safety & Fire extinction system
300,000
Air conditioning
200,500
1,395,500
10. Other Machinery and Equipments
Owner should also procure other required machinery and equipments and make sure that those items delivered just after civil phase completion and before production machinery installation. Other machinery and equipments has been classified into three sub categories of Other Equipments, Handling and Transportation Equipments, and Admin & IT Equipments. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units. Maximum budget allocated for each unit was calculated considering current typical price for construction of same size and same type units.
10.1. Other Equipments
The cost of other equipments required for the production and Quality Control of products and maintenance of machinery is shown on table 10.
Table 10- Other Equipment Cost
Machinery
Cost
Cooling systems & Automation
202,400
Warehousing equipments
107,500
Laboratory equipments
184,000
Repair equipments
73,600
Overhead crane
135,000
702,500
10.2. Handling & Transportation Equipments
The cost of necessary Handling & equipments is shown on table 11.
Table 11- Handling & Transportation Equipments Cost
Vehicle
Number
Price/unit
Value
Passenger car
1
65,000
65,000
Van
1
85,000
85,000
Forklift
1
84,000
84,000
234,000
10.3. Admin & IT Equipments
The cost of necessary Admin & IT equipments is shown on table 12.
Table 12- Admin & IT Equipments Cost
Items
Cost
IT Equipments
29,800
Photocopy
5,000
Fax
700
Furniture
44,000
Stationary
3,000
82,500
11. Investment Capital
Total required Investment capital for this project likewise any other project is segmented into Investment capital for Fixed Asset and Working Capital. Fixed Assets costs inclusive of Design & Drawing cost, civil construction cost, machinery & Equipments and Utility Installation have explained on last chapters. Land wouldn�t be considered as a fix asset since the allocated land for this project shall be on Long Term Lease Agreement with the Industrial Aria Land Authorities. Investment capital for Fixed assets is shown on table 13.
11.1 Investment Capital for Fix Asset
Table 13-Investment Capital for Fixed Asset
Asset
Asset value
Land
-
Factory & Office Building
1,162,720
Machinery & Equipments
16,878,400
Utility Installation
1,395,500
Handling & Transportation Equipments
234,000
Admin Equipments & IT
82,500
Design & Engineering
200,000
19,953,120
11.2 Working Capital
The working capital required for preliminary operation of the project, startup and commissioning and raw material was calculated based on parameters which demonstrated on table 14.
Table 14- Working Capital
Asset
Description
Value
Raw material
4 months required raw material (13)
6,139,467
Wages
6 months wages (10)
739,200
Petty cash
4 months days utility cost
259,067
7,137,733
11.3 Total Investment Capital
Total Investment capital required for HDSS Production Plant is Fix Asset Capital requirements plus 10% of asset values as contingency plus required working capital.
Total Investment Capital = 19,953,120 + 1,975,312 + 7,137,733 = AED 29,066,165
12. Sales Price
Generally, HDSS customers procure packaging materials through a long term supply agreement. HDSS is a packaging material and daily being used. Therefore, customers procurement in order to maintain proper amount of stock and save money (economy of scale) and prevent production delay, utilizes Long term supply agreement in which the total quantity and delivery schedule is well specified.
Pricing also is set in a formula which is consisting of two parts of Fix Conversion Price and Variable Main Raw Material Price.
Fix conversion cost is inclusive of Direct and Indirect Production cost, Packaging, Transportation, Legalization and profit of HDSS supplier. This fixed Price must be fixed for the entire Agreement period.
Variable Main Raw Material Price is the monthly Price of PE which customers reimburse the same. Normally an international Polymer Price publishing is considered as the bench mark.
The pricing strategy of Fix conversion cost is mainly determined by the market forces and the existing competition. As per competitor intelligence survey, current HDSS conversion rate is about 2.79 AED/Kg and there has been noticed a history price increment trend of almost 10% over last few years. Therefore, it is highly recommended to consider at least 1% less than current conversion rate at 2.76 AED/Kg to have competitive advantage over existing rivalry.
13. Direct Production Costs
Direct Production Costs are those resources that are expanded solely to complete the production of final finished products. Costs of Raw Material, Direct Labor, Power & Water, Packaging & Shipping, and maintenance were considered as Direct Production Cost of HDSS.
13.1 Raw Material
Raw material cost for the first year of operation is shown on table 15.
Table 15- Raw Material Cost
Material
Price/Ton
Consumption
Year-1 Tonnage
Cost
LDPE
4,000
15%
578
2,886,354
LLDPE
4,784
70%
2,695
12,892,880
HDPE
3,600
15%
578
2,639,175
3,850
18,418,400
13.2 Direct Payroll
Direct Payroll for the first year of operation is shown on table 16.
Table 16- Direct Payroll
Position
Annual Salary
Number
Total
Procurement
87,635
1
87,635
Engineer
87,635
1
87,635
Technician
47,873
2
95,746
Worker
39,894
14
558,519
829,535
13.3 Electricity & Water
Electricity & Water cost for the first year of operation is shown on table 17.
Table 17- Electricity & Water Cost
Unit
Price/unit
Daily consumption
Annual consumption
Total annual cost
Water
M3
3.6
20
2,000
7,200
Electricity
KWh
0.2
3,000
3,850,000
770,000
777,200
13.4 Packing & Shipping
Packing & Shipping cost for the first year of operation is shown on table 18.
Table 18- Packing & Shipping Cost
AED/Kg
Qty
Cost
Packaging & Shipping
0.18
3,850,000
693,000
693,000
13.5 Maintenance
Maintenance cost for the first year of operation is shown on table 19.
Table 19- Maintenance Cost
Asset
Asset value
Percentage
Cost
Building
1,162,720
1%
11,627
Machinery & Equipments
16,878,400
1%
168,784
Utility Installation
1,395,500
1%
13,955
Transportation
234,000
5%
11,700
Admin Equipments & IT
82,500
10%
8,250
214,316
14. Indirect Costs
Indirect costs are those resources that need to be expanded to support the production but that are also associated with other activities such as Admin, legal and annual charges. Costs of Admin Expenses, Indirect Payroll, Insurance & Land Lease, and Depreciation were considered as indirect cost for production of HDSS.
14.1 Indirect Payroll
Indirect Payroll for the first year of operation is shown on table 20.
Table 20- Indirect Payroll
Position
Basic
Allowance
Annual Salary
Number
Total
CEO
18,000
8,000
312,000
1
312,000
Manager
7,000
4,000
132,000
2
264,000
Executive
4,200
2,800
84,000
1
84,000
660,000
14.2 Insurance & Land Lease
Insurance & Land Lease cost for the first year of operation is shown on table 21.
Table 21- Insurance & Land Lease Cost
Item
Cost
Insurance
76,000
Land rent
67,000
143,000
14.3 Admin & Other Indirect Overheads
Admin & Other Indirect Overheads cost for the first year of operation is shown on table 22.
Table 22- Admin & Other Indirect Overheads
Item
Cost
Admin & Other Indirect Overheads
500,000
500,000
14.4 Depreciation
Straight line method has been utilized for the calculation of depreciation. Assets considered with no salvage value which is so pessimistic in this case. Asset depreciable life varies depends to its nature and life cycle. Depreciation is shown on table 23.
Table 23- Depreciation
Asset
Asset value
Percentage
Cost
Building
1,162,720
5%
58,136
Machinery & Equipments
16,878,400
10%
1,687,840
Utility Installation
1,395,500
10%
139,550
Transportation
234,000
10%
23,400
Admin Equipments & IT
82,500
20%
16,500
1,925,426
15. Break Even Analysis
Break even analysis involves finding the level of sales necessary to operate a business on break-even basis.
Selling Price (SP) = 7.54
Variable Cost (VC)= 5.164 (Raw Material, Energy, Packing & Shipping)
Fixed Costs (FC)= 4,272,277 (Payroll, Maintenance, Insurance & Lease, Admin Cost, Depreciation)
Break Even Point = FC/SP-VC
Break Even Pont = 1,795,074 Kg
BEP= 1,795,074 Kg
Table 24- Break Even Point
Another valuable date that Break Even Analysis provides is the lowest possible sales price or rock-bottom price that sales price could be set to cover fix and variable cost without occurring any loss.
Quantity (Qty) = Year 1 sales = 3,850,000
Variable Cost (VC)= 5.164 (Raw Material, Energy, Packing & Shipping)
Fixed Costs (FC)= 4,272,277 (Payroll, Maintenance, Insurance & Lease, Admin Cost, Depreciation)
Min SP = (FC + (Qty x VC))/ Qty
Min Sales Price = 6.275 AED
16. Financial Analysis
To perform financial analysis and 6 years forecast such as Profit & Loss Account, Cash Flow, Return on Investment (ROI) and Internal Rate of Return (IRR) following assumptions have been considered.
Capacity
Maximum Nominal Capacity (Kg)
8,000,000
Production rate to nominal capacity for Year 1
49%
Production rate to Nominal capacity- Maximum capacity reached
96%
Total Investment Required (AED)
Fixed Capital
21,928,432
Working Capital
7,137,733
Total Capital
29,066,165
Leverage ratio (Debt/Equity)
1.37
Equity
12,266,165
Loan
16,800,000
Interest Rate
6.50%
Loan repayment period
5 years
Loan repayment per year
3,360,000
Year 1 Values (AED)
Conversion rate per unit
2.76
Sales price per unit (Conversion + Raw material Price)
7.54
Raw material price per unit
4.784
Energy
777,200
Direct Payroll
829,535
Indirect Payroll
660,000
Maintenance
214,316
Sales & Official Costs
500,000
Packaging & Shipping Cost
693,000
Fixed Overheads
143000
Depreciation (Stay constant)
1,925,426
Increase in values per year
yearly increase in conversion rate
10%
yearly increase in cost per year
10%
Raw material price remains constant
16.1 Profit & Loss Account
PARTICULARS
Year-1
Year-2
Year-3
Year-4
Year-5
Year-6
Maximum Capacity (Kg)
8,000,000
8,000,000
8,000,000
8,000,000
8,000,000
8,000,000
Sales (Kg)
3,850,000
5,200,000
6,400,000
7,400,000
7,600,000
7,700,000
Production Rate(%)
48%
65%
80%
93%
95%
96%
Conversion Rate (AED/Kg)
2.760
2.898
3.043
3.195
3.355
3.523
Sales Price per Unit (AED/Kg)
7.54
7.68
7.83
7.98
8.14
8.31
Turnover
29,044,400
39,946,400
50,092,160
59,044,933
61,854,859
63,960,336
Raw Material Price (AED/Kg)
4.784
4.784
4.784
4.784
4.784
4.784
Raw Material Cost
18,418,400
24,876,800
30,617,600
35,401,600
36,358,400
36,836,800
% Of Revenue
63%
62%
61%
60%
59%
58%
Energy
777,200
1,040,000
1,280,000
1,480,000
1,520,000
1,540,000
% Of Revenue
2.68%
2.60%
2.56%
2.51%
2.46%
2.41%
Direct Payroll
829,535
912,489
1,003,737
1,104,111
1,214,522
1,335,974
% Of Revenue
2.86%
2.28%
2.00%
1.87%
1.96%
2.09%
Maintenance
214,316
267,895
334,869
418,586
523,232
654,041
% Of Revenue
0.74%
0.67%
0.67%
0.71%
0.85%
1.02%
Packing & Shipping
693,000
942,480
1,159,250
1,344,730
1,479,204
1,479,204
% Of Revenue
2.39%
6.50%
6.50%
6.50%
6.50%
6.50%
Direct Production Cost
20,932,451
28,039,664
34,395,457
39,749,027
41,095,358
41,846,018
% Of Revenue
72%
70%
69%
67%
66%
65%
Indirect Payroll
660,000
726,000
798,600
878,460
966,306
1,062,937
Admin & Other indirect Over Heads
500,000
560,000
627,200
702,464
786,760
881,171
Insurance & Land Lease
143,000
143,000
143,000
143,000
143,000
143,000
EBIDT
7,468,949
11,203,737
14,926,504
18,450,442
19,829,741
21,090,146
% Gross Profit Margin Ratio
26%
28%
30%
31%
32%
33%
Depreciation
1,925,426
1,925,426
1,925,426
1,925,426
1,925,426
1,925,426
EBIT
5,543,523
9,278,311
13,001,078
16,525,016
17,904,315
19,164,720
Interest
1,010,100
791,700
573,300
354,900
136,500
-
Interest Cover
6x
14x
29x
65x
195x
Tax
-
-
-
-
-
-
Net Profit
4,751,823
8,705,011
12,646,178
16,388,516
17,904,315
19,164,720
% ROS
16%
22%
25%
28%
29%
30%
16.2 Cash Flow Statement
PARTICULARS
Year-1
Year-2
Year-3
Year-4
Year-5
Year-6
Free Cash Before Interest & Dep.
7,468,949
11,203,737
14,926,504
18,450,442
19,829,741
21,090,146
Interest
1,010,100
791,700
573,300
354,900
136,500
0
Net Cash Acquired Before Loan repayment
6,458,849
10,412,037
14,353,204
18,095,542
19,693,241
21,090,146
Repayment of Loan
3,360,000
3,360,000
3,360,000
3,360,000
3,360,000
0
Net Cash Inflow For The year
3,098,849
7,052,037
10,993,204
14,735,542
16,333,241
21,090,146
Accumulated Cash
3,098,849
10,150,886
21,144,089
35,879,631
52,212,872
73,303,018
16.3 Internal Rate of Return (IRR) & Return on Investment (ROI) Analysis
In order to consider what leverage ratio (Debt/Equity) should be taken before investment, two options have been evaluated and IRR and ROI which are two vital profitability indicators of any projects, are calculated.
16.3.1 Equity 100%
IRR Analysis with 100% Equity
Equity
29,066,165
Leveraged Cash Flow
-29,066,165
7,468,949
11,203,737
14,926,504
18,450,442
19,829,741
21,090,146
IRR
33%
ROI = Average yearly Net Profit for 5 years / Total capital invested
ROI = 43%
16.3.2 Equity 42% & Debt 58%
IRR Analysis with 42% Equity
Equity
12,266,165
Leveraged Cash Flow
-12,266,165
3,098,849
7,052,037
10,993,204
14,735,542
16,333,241
21,090,146
IRR
55%
ROI = Average (Yearly Net Profit � Repayment of Loan) for 5 years / Total Equity Invested
ROI = 69%
Based on the ROI and IRR calculation, a leveraged investment at the ratio of 1.38 would be more profitable in long term. Therefore, investors shall raise equity equal to 42% of total capital investment with the amount of AED 12,266,165 and accordingly apply for project loan with the amount of AED 16,800,000.
Total Capital
100%
29,066,165
Equity
42%
12,266,165
Loan
58%
16,800,000
Table 25- Equity & Loan
17. Summary and Conclusion
The current demands and growth rate of the HDSS market requires more supplies entry into the market. Available production technology and state of the art machinery ensure a productive and efficient production compare to other existing manufacturer. Availability of raw material in the region and short distance of transportation and logistics for supply of raw materials and delivery of finished goods to the regional market and utilizing enhanced transportation system of the UAE, brought a positive evaluation feedback and set such project as feasible.
Analysis results of this study also have shown that with sales of only 22.5% of the total capacity, this project reach to its break-even. Other values, such as low fixed cost and low energy cost in the UAE, risk free pricing strategy and tax free revenue, make investment in this project with minimum risk and highly profitable.
