BUSINESS PLAN FOR THE PURCHASE OF FARM
TRACTOR WITH ITS ACCESSORIES
PROMOTER: GEZU, NEIMA AND THEIR FRIENDS SHARE ENTERPRISE
LOCATION: OROMIA REGION, WEST ARSI ZONE, NAGELE ARSI TOWN
PREPARED BY:
YUSUF AMAN
ECONOMIC DEVELOPMENT, BUSINESS AND INVESTMENT CONSULTANT
0916-51-80-14 / 0916-49-44-44
FEBRUARY, 2023
February 15, 2023
[BUSINESS PLAN FOR THE PURCHASE OF FARM TRACTOR]
Contents
Executive summary.................................................................................................................... 3
Summary of the project .............................................................................................................. 4
1.
Introduction ........................................................................................................................ 5
2.
Market analysis ................................................................................................................... 6
2.1.
General consideration .................................................................................................. 6
2.1.1. Tractors and implements .......................................................................................... 6
2.1.2. Market organization and supply chain actors ........................................................... 7
2.1.3. Importers/dealers ...................................................................................................... 7
2.2.
Supply and demand analysis ....................................................................................... 9
2.2.1.
The demand sides ................................................................................................. 9
2.2.2.
The supply sides ................................................................................................. 10
3.
Credit exposure and way of financing .............................................................................. 11
4.
Proposed location ............................................................................................................. 11
5.
Products ............................................................................................................................ 11
6.
Pricing and distribution .................................................................................................... 12
7.
Management of the business and organizational structure ............................................... 12
8.
Personnel .......................................................................................................................... 12
9.
Insurance ........................................................................................................................... 12
10.
Driving factors for lease finance ................................................................................... 12
11.
Collaterals and source of repayment ............................................................................. 13
12.
The goal and objective of the project ............................................................................ 13
12.1. The goal of the project ................................................................................................ 13
12.2. Objective of the project ............................................................................................... 13
12.3. Operational plan and major activities.......................................................................... 13
13.
Project outcomes ........................................................................................................... 14
14. SWOT analysis of the project ............................................................................................ 14
14.1. Strength ....................................................................................................................... 14
14.2. Weaknesses ................................................................................................................. 14
14.3. Opportunities ............................................................................................................... 15
14.4. Threats ......................................................................................................................... 15
15. Financial feasibility of the project ................................................................................... 15
15.1.
Basic assumptions .................................................................................................... 15
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15.2. Project costs and revenues........................................................................................... 16
15.3. Projected statement of financial position (Balance sheet) .......................................... 17
15.4. Projected statement of financial performance (Income statement) ............................. 17
15.5. Cash flow statement (projection) ................................................................................ 17
15.6. Loan (lease) repayment schedule ................................................................................ 18
15.7. Depreciation schedule (book value/ pooling method)................................................. 18
15.8. Profitability Index (Benefit/Cost ratio) ....................................................................... 18
15.9. Payback period ............................................................................................................ 18
15.10. The Net Present Value .............................................................................................. 18
15.11. Break-Even point....................................................................................................... 18
15.12. Internal Rate of Return ............................................................................................. 19
16. Future development and exit strategy ................................................................................ 19
17. Environmental and social impact of the project ................................................................ 19
17.1. Positive impacts – Benefits at national and local levels.............................................. 19
17.2. Potential adverse impacts and proposed mitigation measures .................................... 20
18.
Conclusion .................................................................................................................... 21
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Executive summary
Promoter: Gezu, Neima and their friends share enterprise
Address: Oromia region, West-Arsi zone, Nagele Arsi town
Telephone: 0911062114
Tax identification number:
Project type: Agricultural Farm Tractor
Way of financing: Lease financing
Source of finance:
a. Tractor and accessories cost 100% covered by Development Bank of
Ethiopia that is ETB 8,452,805.00 and
b. The owner contributes 100%, ETB 1,690,561.00 for working capital
Lease repayment period: 5 years
Total cost of the project: 10,143,366.00
Payback period of the project: Four years and two months with additional
proceeds.
Net present value of the project: - Positive 17,384,601.28 ETB after tax
Profitability index: - The project generates 2.71 birr for each birr invested (i.e.,
its profitability index is greaterthan1),
Internal rate of return: - The IRR of this investment is 18.97%
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Summary of the project
This profile describes the business plan to acquire a farming tractor. The farming tractor is for
the purpose of ploughing agricultural lands on rental basis and generating income through it.
Gezu, Neima and their friends share enterprise the owner and the manager of the business
is residing in Oromia region, West Arsi zone, Nagele Arsi town.
Ethiopia is predominantly agrarian country where about 85% if its labor engaged in
agriculture. The sector heading all sector with 50% contribution to GDP and about 85% of
export earnings. Though mechanization of agriculture in Ethiopia goes back many decades,
until these days, the sector is not fully mechanized. Hence it is in capable of feeding the
nation. Thus, to feed the nation and export the remaining to the rest of the world the sector
needs technological interference like mechanization. Though there is a number of farming
tractor in the country and in the specific area, the demand still not filled. Many of our farmers
are still lacking these machines due to shortage of capital to own personally, and shortage of
the machine due to its scarce availability in the market. Therefore, it is of paramount
importance for the promoter of the project and for the community as whole to engage in such
business sector. The business owner Gezu, Neima and their friends share enterprise would
like to acquire one set of farming Tractor (New Holland 127HP) at a price of ETB
5,700,000.00 with one Disc plough at 757,900.00 ETB and one Disc harrows at
1,994,905.00 birr as per the proforma invoice issued from MOENCO share company
dated February 13,2023. The total capital needed that is purchase cost will be 8,452,805.00
ETB. 100% that is ETB 8,452,805.00 of the fund needed for the purchase of the tractor with
its accessories will be covered by the financing bank whereas the owner contributes ETB
1,690,561.00 for working capital expense. The financing repayment including bank profit
on the financing and other related transactional cost can begin promptly within first year of
operation. Source of repayment will be expected from additional income planned to be
generated by the agricultural farming tractor rental and further supported by income from
existing business.
As per the market assessment made income from farming tractor is still encouraging and the
machine may operate widely in its area. On the other hand, the growing trend of economy
and the nation’s stretched plan by its part would have another opportunity as the agriculture is
the backbone of our country. This project generates 2.71 birr for each birr invested (i.e., its
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profitability index is greaterthan1) and the project is feasible at 17,384,601.28 birr of NPV
with positive algebraic sign, with 18.97% IRR (Internal Rate of Return) and with four years
and two-months payback period with additional proceeds accruing to the investor.
1. Introduction
Agriculture in Ethiopia is the foundation and a backbone of the country's economy,
accounting for half of gross domestic product (GDP), 83.9% of exports, and 80% of total
employment.
Besides, having these roles, many other economic activities also depend on agriculture,
including marketing, processing, and export of agricultural products. Since the country is
endowed with almost all types of weather types from high lands to lowlands, the country
produces almost all types of crops. Principal crops include coffee, pulses (e.g., beans), oil
seeds, cereals, potatoes, sugarcane, and vegetables.
Exports are almost entirely agricultural commodities, and coffee is the largest foreign
exchange
earner.
Ethiopia
is
also
Africa's
second
biggest
maize
producer.
Ethiopia's livestock population is believed to be the largest in Africa, and in 2006/2007
livestock accounted for 10.6% of Ethiopia's export income, with leather and leather products
making up 7.5% and live animals 3.1%.
Despite the huge contribution of the sector to the country's economy, the system is
predominantly of subsistence, characterized by the use of traditional farming implements and
practices. The entire field operations at small scale agriculture, where about 83% of the
population is involved, are carried out using hand-tools and thousands of years old tillage
implements with human and animal power which mainly include oxen plow farming system
particularly in open cereal dominating production system. Similarly, farm operations in crop
production, animal husbandry and forestry by large are performed with bare hands or using
very rudimentary farm tools. To meet the food demand of the ever-increasing population and
finance the other sectors of the economy, it is imperative to increase production and
productivity. This is attainable by the introduction of a wise mix of bio-chemical, socioeconomic and physical science-based technologies to the agricultural
Thus, developing appropriate mechanization technology will improve production and
productivity, reduce the huge production losses and it has a great contribution to food
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security. Moreover, it is only when the environment is made conducive through proper use of
animate and inanimate energy and improved implements; other bio-chemical inputs could
perform to their optimum potential. They also improve working conditions and the
performance of jobs that would otherwise be difficult to accomplish in the traditional way.
2. Market analysis
2.1. General consideration
Ethiopia has a long history of involvement with the 4WT. To nurture agricultural
mechanization, state farms both irrigated and rain fed have played a very big role, especially
during the second period of “socialist experimentation”, when large mechanized state farms
were established totaling about 200,000 hectares, out of which about 47,000 hectares were
irrigated. (FAO Vol. 20, 2013) Another mechanization approach tried in the 70s to 90s period
was government operated tractor hire schemes. These were later abandoned; partly due to
heavy financial burden on the government as a result of subsidizing the service (Sims, 2006).
Furthermore, timeliness of the agricultural operations was difficult to achieve because of
conflict among users of the service. Studies on the economic benefits of these schemes were
also carried out during this period and it was concluded, based on the various shortfalls
identified, that government managed and operated tractor hire schemes were not successful
and were consequently largely abandoned in the late 1990s. In Ethiopia, an estimated 5,090
tractors were in use as of 2010, a significant increase since 2004 when the number was about
3,000. The 2010 figure increases to about 6,000 when “walking” or pedestrian tractors are
included. The number of tractors per 100 square km of arable land was about 4.0 and 4.7
respectively with and without the pedestrian tractors. This steady increase in the number of
tractors is primarily attributable to the growing number of foreign private investors engaged
in large commercial agriculture in Ethiopia, mainly from China, India and Saudi Arabia (WB
report, No. 68237)
2.1.1. Tractors and implements
In terms of agricultural technology, tractors are the most important and versatile type of
equipment used by farmers wanting to mechanize some or all of their farm operations. Apart
from providing an important means of transporting heavy farm inputs and produce to and
from the farms, tractors are useful in coupling other motorized and non-motorized
implements for the efficient and timely land preparation that is necessary for achieving high
yields and minimizing postharvest losses (FAO 2008b). Furthermore, in Ethiopia, because of
the problem of dwindling cultivable land area due to population pressure and changes in
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ecosystems and production landscapes from the overutilization of the arable soil, there is the
need to cultivate the marginal and hilly lands to satisfy the increase in demand for food and
other agricultural raw materials. Unfortunately, human labor is not adequately equipped to
grapple effectively with these changes in ecosystem and production landscapes.
2.1.2. Market organization and supply chain actors
To understand the overall technology market system for small scale mechanization
technology it is useful to understand the key players involved in the system. The sub sector
analysis recognized the importance of three major group that have to work together to ensure
success. These are the private sectors, service providers and farmers. Each group has a
different role to play and represent different interests. For sustainable mechanization, the role
of each of these group should be clearly defined and there should be good coordination so
that there are complementary.
2.1.3. Importers/dealers
The private sector has greater role to play in the production, transformation and
commercialization of agricultural product. The agricultural mechanization private sector is
represented by local importer, manufacturer and dealer. Here in Ethiopia, we do have around
12 importers/manufactures /dealers that involved in agriculture machinery business. Some of
them are TGT Plc, Kaleb service Plc, METEC, Ries Engineering, Gedeb Engineering, Adeb
Engineering, Moenco, Hagbes, AETS, Amio Engineering. On this study I mentioned below
in detail those companies that involved in 4 WTs and 2 WTs business. Kaleb Service PLC
Kaleb service PLC established 22 years ago with a vison to become the biggest manufacturer
in the country. The company imports and sells both heavy duty tractors with range of 35-400
hp, combine harvesters and agricultural implements. The heavy-duty tractors are CLAAS
brand. During the last 22 years, the company imported 1000 combine harvesters which make
the company to take the biggest market share in the combine business. So far, the company
imports and sold around 12-wheel tractors with 12.5 hp from china and planning to import
another brand from Italy. The company provides after sale service like training for operator,
maintenances and repairs for damaged components within one year of warranty period. The
company imports tractor attachments, forage cutters, trailers, planters, Sheller, threshers,
sprayers and harrows. The implements are generally the heavy-duty tractors attachment
types. Mechanical seed drill, Sheller and multi-crop threshers are being manufactured by the
company locally. The company participates on trade fair, demonstration and personal contact
as a means of promoting the product and equipment’s. The challenges on importation of
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walking tractor especially from china are unwanted vibration as per feedback from clients
and after sale service since Dong Feng brand don’t have a sole agent and the tractors are sold
in many trading houses. Adama Agricultural Machinery Industry (METEC – AAMI) Another
major player in the tractor industry in Ethiopia is the Adama Agricultural machinery industry
which formerly called Nazareth Tractor Assembly Plant (NTAP), a government factory that
is engaged in assembling “semi-knocked down” (SKD) tractor parts. The Nazareth plant was
established in 1978 as part of an economic and technical cooperation agreement between the
Ethiopian government and the former Union of Soviet Socialist Republics. NTAP is involved
in assembling pedestrian-controlled tractors with 8-15HP, small size tractors with 18-40HP
(18, 25, 30 and 40 HPs) and heavy-duty tractors with 57, 62, 81, 90, 105, and 130 HP). It is
also engaged in the production of simple implements such as disc harrows and disc plows, as
well as in the assembly of 6, 8, 10- and 12-ton trailers for haulage and transportation of
agricultural inputs and products. During the period NTAP has been in operation, it has
produced a total of about 6,000 tractors mostly small to medium sized at the rate of one
tractor per day using 3 man-day labors. NTAP was renamed the Adama Agricultural
Machinery Industry (AAMI) in 1992. It was transferred to the Metal and Engineering
Technology Corporation (METEC) in 2010. Within the last three years, it is estimated that
METEC has imported around 5000 tractors and 3000 two wheeled tractors, increasing the
previous estimate to around 10,000 tractors. So far, more than 1000 of imported 2 WTs have
been sold to the regions and Southern region took the biggest share by purchasing 300
walking tractors. The walking tractors are multipurpose models which can plough, harrow,
plant, pump water, thresher and transport depending on the accessory attached to them. The
industry promotes the tractors and service through mass media, broachers and displays on
field and trade fairs. Sales are made both on cash and credit basis. Agricultural Equipment
and Technical Services (AETS) AETS established 25 years ago with a vison to be a center for
agricultural technology transformation in the country by rendering an integrated and
customer driven mechanization services, boost up productivity and development of modern
farms. Currently, the company do have many functions some of them are importing,
distributing of agricultural machinery, implements of tractors and maintenance, technical
training and consultancy service. The company do have a total capital of 271,003,316 Birr
and imported a total of 4, 832 tractors with different hp, 1000 combine harvesters, 10,000
agricultural implements and 24 two-wheel tractors. Out of the 24 two wheeled tractors
imported from China in 2013, only 4 walking tractors sold so far and the buyer were also
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private individual in Addis Ababa. As per the feedback from the clients, they still didn’t hear
any complaint on the quality of the tractors except one on safety belt breakage. AMIO
Engineering AMIO Engineering Imported 25 Sifang and 2 Dong Feng china made walking
tractor in 2012 and sold 15 of them. The main reason for Amio to bring this two-brand tractor
was to see their difference on performance and claimed Dong Feng engine is poor and Sifang
also need modification to attach implement on the tractors. Sales were made on cash basis.
After sale service includes one-year warranty period and training for operators. The
challenges for not selling all the tractor to clients are affordability and low tillage efficiency.
Amio also imports ploughs, trailers, harvesters/reapers, planters, pumps, Sheller and forage
cutters. The company maintains fast moving spare parts from stock. Problems mentioned
include: low market demand, low comfortableness of tractors, no proper skill and training for
operators to operate the tractors, no quality control system. Amio Engineering do have
experience working with IDE Ethiopia on voucher system on providing subside water pump
for unions. They believe 2 WTs do have a potential to scale up in specific area but all depend
on soil type and awareness creation for clients.
2.2.Supply and demand analysis
2.2.1. The demand sides
Guush Birhane et,el (2017) has undertaken research in relation to agricultural mechanization
status in Ethiopia. They found that, in land preparation, an average 78.8 percent of plots were
prepared by animals, compared to 0.7 percent prepared by machine; and with threshing,
almost 50 percent of plots were worked manually, 47.9 percent with animals, and only 0.8 by
machines. In addition, the research explored mechanization of different crop types, finding
wheat as the dominant crop in which machinery is used in Ethiopia, albeit still low compared
to Africa as a whole. Over time, the research shows a huge change in imports of agricultural
machinery - notably tractors - up until 2014. These tractor imports were mostly driven by the
expansion of the AAMI (Adama Agricultural Machinery Industry) – Ethiopia’s main
importer of tractors. However, since then, the AAMI has experienced a rapid decline in sales
of all types of Tractors (Figure 1). Yet, there has been a rapid increase in combine-harvester
imports over these same periods which continue to grow.
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Figure 1: Changes in tractor sales over time
Source: Authors’ calculations based on AAMI sales data
In Ethiopia, the research carried out shows strong spatial patterns in mechanization,
concentrated largely in the Arsi/Bale area, Western Tigray and parts of Somali region. The
reasons for this concentration of machinery in the south-east of the country could be
attributed to the presence of commercial farms or generally larger smallholder farms, a
history of interventions, higher rural wages, flat and stone-free terrain, and two harvests
which add pressure to get the work done on time, hence the important use of machinery.
2.2.2. The supply sides
With no manufacturers of combine-harvesters or tractors in the country, high taxation rates,
and limited access to foreign exchange, these have all contributed to the hurdles encountered
by farmers wishing to use modern machinery. The situation however, has alleviated slightly
with greater priority from the government to improve mechanization and from the
involvement of the private sector in dealerships. The research shows that 60 percent of
tractors are owned by commercial farmer’s/state farms, with the remaining 40 percent owned
by service providers. In the case of combine-harvesters, 90 percent are owned by service
providers which play a massive role in delivering services to farmers – but this comes at a
cost. Almost more than 90% of agricultural machineries specifically farming tractor are
owned by commercial farmers and government mechanization center. Because of its high
cost, farmers are unable to purchase farming tractor by their own finance sources. The type of
financing like the one undertaken by the development bank needs to be implemented at root
level. Since the payment is periodical, it might be easy for many farmers to own the machines
over time.
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3. Credit exposure and way of financing
Gezu, Neima and their friends share enterprise has no credit experience. However, since
the purpose of this project is not to take credit from the bank, he has the courage to undertake
the project. The project is going to be executed under lease financing procedure. The business
owner Gezu, Neima and their friends share enterprise would like to acquire one set of
farming Tractor (New Holland 127HP) at a price of ETB 5,700,000.00 with one Disc
plough at 757,900.00 ETB and one Disc harrows at 1,994,905.00 birr as per the proforma
invoice issued from MOENCO share company dated February 13,2023. The total capital
needed that is purchase cost will be 8,452,805.00 ETB. 100% that is ETB 8,452,805.00 of the
fund needed for the purchase of the tractor with its accessories will be covered by the
financing bank whereas the owner contributes ETB 1,690,561.00 for working capital
expense. Source of repayment will be expected from additional income planned to be
generated by the agricultural machine rental and further supported by income from existing
business. Hence, it is a leasing of agricultural tractor from the financing bank which is leased
to a client for stream of rental and purchase payments ending with transfer of ownership to
Gezu, Neima and their friends share enterprise after the final contract period.
4. Proposed location
The proposed farming tractor can move from one area to another area. This could facilitate
for the movement of machine from one center to another center. Besides, since the timing of
farming in different areas of the country differs to some extent, the machine can move to
different parts of the country specially Oromia region making its center Nagele Arsi.
Thus, the market is available in different parts of the country and regions with special
attention given to zones of West Arsi, Arsi, Bale, Guji and Borena.
5. Products
Providing effective agricultural mechanization service of ploughing land for cereals like
Wheat, Barley, Maize, Sorghum and Teff which are dominant cereals in the country
accounting for about 65% of the
cereals in Ethiopia and other cereals also as deemed
necessary.
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6. Pricing and distribution
The current average price of ploughing a hectare of land ranges from 3,000 to 3,500 birr. For
better marketing, Gezu, Neima and their friends share enterprise share enterprise is
going to charge only the lower limit, which is 3,000 per hectare on average for different
types of soil.
7. Management of the business and organizational structure
As the business is sole proprietor, it is managed and controlled by the owner Gezu, Neima
and their friends share enterprise who has good experience in running and managing his
business. The envisaged Gezu, Neima and their friends share enterprise farm tractor
business has the following organizational structure
The owner (Manager)
Operator
Assistant operator
Figure 1: Organizational structure
8.
Personnel
The planed work will require the employment of one operator and one assistant to the
machine. Their salary is paid per month for the whole year. Their peridium will be paid birr
400.00 & 400.00 for the driver and its assistance respectively when the machine is in
operation. Both salary and peridium will increase over the years based on profitability and
business performance.
9. Insurance
Product liability is a major consideration. Personal liability, ensuring Life insurance, property
insurance, and third-party insurance coverage will be needed. Important insurance coverage
shall be bought as deemed necessary and renewed periodically right after acquisition of the
property.
10. Driving factors for lease finance
Gezu, Neima and their friends share enterprise wants to own one Farming Tractor with all
accessories for his own business to generate income from the machine through rental.
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Previously he has been engaged in the farming activity on rental farm land at Nagele Arsi
woreda as a farmer. Income currently generating from the existing farming would be another
initiative factor to this agricultural machine. The intended project will need initial total capital
of ETB 10,143,366.00 (ten million one hundred forty-three thousand three hundred
sixty-six birr only) and other related costs like title transfer and insurance premium. Thus,
assuming to cover total cost from internal source would bring working capital constraint on
existing business.
11. Collaterals and source of repayment
The projected financial statements and viability and profitability of the project is discussed in
section here under of this document. It is believed that the proposed project will generate
income that covers the repayment of the bank finance. To meet the legal terms of the bank an
applicant offers the tractor which is purchased as physical collateral to secure the loan
(lease). The applicant’s experience in the business he has been running so far and the sound
business plan implementation are believed to make the intended business profitable and ease
the fund reimbursement on time. An applicant can use also his alternative income source to
repay the fund as per the agreement signed with the bank.
12. The goal and objective of the project
12.1. The goal of the project
The goal of the project is to create financial wealth for the owner of the business by
supporting farming activity of owner when the product is needed and to generate optimum
income from the intended business activity.
12.2. Objective of the project
1. Assist the farmers in ploughing their land.
2. Provide agricultural machine to the areas with affordable price.
3. Enhance and insure owner additional income from diversified business line.
12.3. Operational plan and major activities
A sound action or operational plan will be put in action in order to realize the project
objective and meet the project goal. The action plans with the major activities are outlined
here under.
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Major activities of the project
 Business plan preparation
 Lease finance processing activities facilitation
 Acquiring the machine(tractor) with accessories
 Legal work and insuring the property
 Hiring of employees
 Providing intended services directly to users.
 Repayment of rent until acquisition
 Monitoring and controlling the project activities
 Maintenance
13. Project outcomes
The intended project;
 Enables the owner to generate additional income
 Create job opportunity
 Strengthen the agricultural mechanization industry in the area.
 Contribute to government income through profit and employment income taxes.
14. SWOT analysis of the project
14.1. Strength
 The fact that the owner of this business is running agricultural farming business in
addition to the current business and this one is a plus for that business. The project will
also have employed professional and capable employees who thoroughly understand the
business and are dedicated to help the business services. Finally, the owner Gezu, Neima
and their friends share enterprise is a renowned businessman with the necessary
experience that will allow the business attain all its goals and objectives and he have
strong commitment to realize the project
14.2. Weaknesses
 Shortage of sufficient working capital to operate at high capacity
 High start-up capital
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14.3. Opportunities
 Existing and mushrooming of market-based in the country in general and in particular
 The strong support and incentives from the government;
 The output of the project is required for consumption of every household.
 Existence of sufficient labor resources
14.4. Threats
 Unpredictable weather condition;
 Higher competition and illegal markets
15. Financial feasibility of the project
The projected life of the proposed business is five years. The project will generate revenue
which enables the applicant to pay back the fund and profit mark up through its direct and
indirect impacts on his total income. After project life, the business will be sustained since it
is proved profitable as far as the owner’s business is concerned.
15.1. Basic assumptions
The project life time is five years
For all fixed assets, historical costs have been assumed.
The rate at which revenue increases is 10% which is greater than the rate at which
expenses increase.
The machine gives services in different areas of the country for about 6 months per year.
(Ploughing time in different parts of the country is assumed)
Number of hectares of land ploughed per day to be 15 (a typical machine will plough
about 30 hectares of land per day, we assumed only 8 hrs. per day.)
The number of working days per month depends on the market, on average the machine
will make 20 days per month.
The machine will have a capacity of operating to the maximum of 132 days in a year.
Tariff per hectare is birr 3,000.00
The total salary expense of the driver and assistant is assumed to birr 122,064.00
including pension contribution per month and which will increase by 5% per year.
The total allowance of the driver and assistant per day is birr 105,600.00 in the number of
working days i.e., 132*400=52,800*2 it is increased by 5%/year.
Depreciation expense is 20% of the cost of machine(tractor)
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The total fuel and lubricant expense are birr 6,000 per day *132=792,000.00 (increased
by 5% per year).
Tire will be changed two times yearly
Insurance expense is assumed to be birr 32,000.00/year
Repair and maintenance expense are 150,000.00 per year.
Inspection fee is birr 2,500.00
15.2. Project costs and revenues
Initial investment costs
 Insurance premium
 Purchase cost
Operational cost
 Salary and allowance
 Maintenance
 Insurance
 Depreciation
 Miscellaneous Expense
 Repayment of bank finance
Cost projection
Item/Year
Fuel expense
Peridium
Salary and allowances
Cost of Tire
Insurance expense
Inspection fee
Repair and maintenance
Miscellaneous expense
Contingency 10%
Total cost & expense
st
nd
rd
th
th
1 year
2 year
3 year
4 year
5 year
792,000.00 831,600.00 873,180.00 916,839.00
962,680.95
105,600.00 105,600.00 105,600.00 105,600.00
105,600.00
122,064.00 128,167.20 134,575.56 141,304.34
148,369.55
120,000.00 126,000.00 132,300.00 138,915.00
145,860.75
32,000.00
33,600.00
35,280.00
37,044.00
38,896.20
2,500.00
2,625.00
2,756.25
2,894.06
3,038.77
150,000.00 157,500.00 165,375.00 173,643.75
182,325.94
32,000.00
33,600.00
35,280.00
37,044.00
38,896.20
135,616.40 138,509.22 144,906.68 151,624.02 158,677.22
1,491,780.40 1,557,201.42 1,629,253.49 1,704,908.17 1,784,345.57
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15.3. Projected statement of financial position (Balance sheet)
Description
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
ASSETS
3,662,329.33
5,177,430.92
7,118,699.28
9,541,294.05
CURRENT ASSETS
1,690,561.00 2,518,191.92
3,662,329.33
5,177,430.92
7,118,699.28
9,541,294.05
Total current Assets
1,690,561.00 2,518,191.92
FIXED ASSETS
Farming Tractor
8,452,805.00 6,762,244.00 5,409,795.20 4,327,836.16 3,462,268.93 2,769,815.14
Total fixed Assets
8,452,805.00 6,762,244.00 5,409,795.20 4,327,836.16 3,462,268.93 2,769,815.14
Total Assets
10,143,366.00 9,280,435.92 9,072,124.53 9,505,267.08 10,580,968.21 12,311,109.19
Liability
5,071,683.00
3,381,122.00
1,690,561.00
Lease
8,452,805.00 6,762,244.00
Capital
Owners’ equity
1,690,561.00 1,690,561.00 1,690,561.00 1,690,561.00 1,690,561.00 1,690,561.00
827,630.92
2,309,880.53
4,433,584.08
7,199,846.21
10,620,548.19
Net Income (cumulative)
Total Liability & Capital
10,143,366.00 9,280,435.92 9,072,124.53 9,505,267.08 10,580,968.21 12,311,109.19
15.4. Projected statement of financial performance (Income statement)
`
1st year
2 nd year
3rd year
4th year
5th year
Revenue:
Income from rental of farming tractor
5,400,000.00
5,940,000.00
6,534,000.00
7,187,400.00
7,906,140.00
Other Income
Total Income
Expenses :
Operating expense
Depreciation expense
Lease service charge (Interest expense)
Total expense
Income before tax
Tax
Net Income after tax
5,400,000.00
5,940,000.00
6,534,000.00
7,187,400.00
7,906,140.00
1,491,780.40
1,690,561.00
972,072.58
4,154,413.98
1,245,586.03
417,955.11
827,630.92
1,557,201.42
1,352,448.80
777,658.06
3,687,308.28
2,252,691.72
770,442.10
1,482,249.62
1,629,253.49
1,081,959.04
583,243.55
3,294,456.08
3,239,543.92
1,115,840.37
2,123,703.55
1,704,908.17
865,567.23
388,829.03
2,959,304.43
4,228,095.57
1,461,833.45
2,766,262.12
1,784,345.57
692,453.79
194,414.52
2,671,213.87
5,234,926.13
1,814,224.14
3,420,701.98
15.5. Cash flow statement (projection)
Description
Cash inflows
Beginning cash balance
Net profit
Adjustment for depreciation
Total Cash inflows
Cash out flows
Scheduled fund repayment
Tax due
Total cash out flow
Cash balance
Cumulative cash balance
Year 1
Year 2
Year 3
Year 4
Year 5
1,245,586.03
1,690,561.00
2,936,147.03
2,252,691.72
1,352,448.80
3,605,140.52
3,239,543.92
1,081,959.04
4,321,502.96
4,228,095.57
865,567.23
5,093,662.80
5,234,926.13
692,453.79
5,927,379.91
1,690,561.00
417,955.11
1,690,561.00
770,442.10
1,690,561.00
1,115,840.37
1,690,561.00
1,461,833.45
1,690,561.00
1,814,224.14
2,108,516.11
827,630.92
827,630.92
2,461,003.10
1,144,137.42
1,971,768.33
2,806,401.37
1,515,101.59
3,486,869.92
3,152,394.45
1,941,268.35
5,428,138.28
3,504,785.14
2,422,594.77
7,850,733.05
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15.6. Loan (lease) repayment schedule
Year Principal payment Interest (11.5%) Total annual payment Remaining principal balance
0
1
2
3
4
5
-
1,690,561.00
1,690,561.00
1,690,561.00
1,690,561.00
1,690,561.00
972,072.58
777,658.06
583,243.55
388,829.03
194,414.52
8,452,805.00
6,762,244.00
5,071,683.00
3,381,122.00
1,690,561.00
-
2,662,633.58
2,468,219.06
2,273,804.55
2,079,390.03
1,884,975.52
15.7. Depreciation schedule (book value/ pooling method)
Items
Farming Tractor
Description
Depreciation expense
Book value
Year 0
8,452,805.00
Year 1
Year 2
Year 3
Year 4
1,690,561.00 1,352,448.80 1,081,959.04 865,567.23
6,762,244.00 5,409,795.20 4,327,836.16 3,462,268.93
Year 5
692,453.79
2,769,815.14
15.8. Profitability Index (Benefit/Cost ratio)
The profitability index is the ratio of the total PV of future cash inflows to the initial
investment, that is, PV/I.
PI=PV/I=27,527,967.28/10,143,366.00.00=2.71
Since this project generates 2.71 birr for each birr invested (i.e., its profitability index is
greaterthan1), the project is acceptable
15.9. Payback period
Based on the projected income statement and investment over the period, the project will
return more than its total initial investment cost in four years and two months of operation.
15.10. The Net Present Value
This is the present value of future net benefits discounted at the appropriate cost of capital
minus the cost of investment. To calculate NPV, we need to find the present value of
expected net benefits of the project discounted at 11.5 per cent and subtract it from the initial
cost of the project. The envisaged project has a positive NPV of birr 17,384,601.28 after
taxes.
15.11. Break-Even point
It is number of units that must be sold in order to produce a profit of zero, point that recovers
all associated costs. In other words, the beak–even point is the point at which your product
stops costing you money to produce and sell, and starts to generate a profit for your company,
as the projections depict the project will break even in the first year of operation.
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15.12. Internal Rate of Return
Internal rate of return (IRR) is defined as the rate of interest that equates initial investment (I)
with the present value (PV) of future cash inflows. In other words, at IRR, PV=I or NPV=0
Since the IRR of the investment 18.97% is greater than the cost of capital (11.5 per cent), the
project is accepted.
16. Future development and exit strategy
The business’s operation is within the dynamic circumstance that requires proactive to this
reality. with the intention to minimize risks and overcome uncertainties of the future an
operator should design and devise effective strategies that enable the promoter to be
successful in the operation. As an entrepreneur, the promoter considers and calculated risks.
Strategies like diversification of the business to other allied activities are recommendable.
Business expansion to additional branches is also another strategy. Besides, the promoter can
also create a joint venture with other investors to share risks associated with the business. As
a final option, selling the machine could be taken as eliminating the risk.
17. Environmental and social impact of the project
It is important to understand the potentially detrimental environmental impacts of the project
so that look for enhancement or mitigation
measures. The impact can bring both positive
and negative effects caused by different activities. Any activity of a human being has its own
positive and negative impact on the environment we are living. However, the difference is
on the extent of its impact from activity to activity. Emphasis should be given to enhance the
positive impacts while mitigating the negative. The project’s positive and negative impacts
with mitigation strategies are discussed here below.
17.1. Positive impacts – Benefits at national and local levels
a. Economic benefits

Contribution to the national economic goals
The project has the capacity to generate revenue for the government through increasing tax
base; from its profit /income and employees’ salary.
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Creating employment opportunities
The project will create employment opportunities for skilled people. As indicated on the
project, it will create a job for 2 peoples on permanent bases
b. Social benefits

Local community income generation and livelihood improvement
The employment opportunity
that will be created by the project will have social benefits
beyond the economic benefits. Employees engaged on the project will earn substantial
income. These benefits will contribute to improve employees and their households’
livelihood: feeding, schooling and health etc. At the same time, it has a role on poverty
reduction by at least increasing the income level of those employed by the project.
17.2. Potential adverse impacts and proposed mitigation measures
Protection issues

Workers need to be provided with ear plugs to avoid noise and the equipment used shall
be in good mechanical conditions.

Workers
need to be provided with adequate protection (helmets, gloves, goggles and
boots) in order to avoid occupational hazards and accidents.

Traffic signs will be posted to warn local communities of heavy traffic during
transportation and delivery of machines and transportation during off-peak hours
Waste disposal and management issues
Solid and liquid waste treatment: generation of waste materials from operation activities of
the machine is expected to be handled in a manner not to damage the surrounding water, air,
land and soil. Hazardous materials shall be treated separately. Solid waste will be segregated
in separate garbage cans according to type, and where necessary it will be incinerated without
causing air pollution.
Fire protection: international codes will be followed for the installation of automatic
Sprinkler systems, heat and smoke detection, emergency responses program, and others to be
utilized.
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Generally, working closely and in cooperation with local communities and encouraging
endogenous knowledge for the conservation and wise use of the natural resources and
mitigation of adverse effects is advisable. Furthermore, to ensure that the damage to the
environment is contained within acceptable limits, the project has to take every appropriate
and corrective measure in consultation with the local environmental agencies and authorities.
18. Conclusion
It is unhidden fact that, agriculture is the backbone of the Ethiopian Economy. The sector
needs to be supplemented by different technology including mechanization. Hence, the sector
needs both private and government interferences. A sector carrying more than 80% labor
force of the country and more than 85% of foreign currency earning cannot be independently
developed. It needs mutual support from both private and government sector. Therefore,
engaging in such activity will have many proceeds. The proceeds may be in terms of income
that will be gained from the activity and mental and social satisfaction by helping the country
feeds its nation and specifically supporting the community so that they can be self-sufficient.
Since the country is running toward industrialization, in these days’ projects in relation to
industrial sector in our country are feasible. These may be attributed to the incentives and
initiatives the current government has taken toward restructuring the sectors of the economy.
Agricultural Development Led Industrialization (ADLI) and other supportive measures the
government has taken have helped the sector to be profitable. Due attention has been taken by
the government in the sector of agriculture, since it is the cornerstone and backbone of the
country’s economy. Thus, investments in the sector of agriculture would be profitable.
Finally, the government and the financing bank deserves a gratitude for preparing such fertile
ground to engage in such business activity and for their support to acquire the agricultural
machineries through lease financing.
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