Feasibility study on fright

Transport business project

Yared Adegu G/Egzabeher

December 5, 2014

1. Introduction
1.1 General Overview Of The Transport Sector
The future patterns of economic performance and population must generally be derived
before future travel patterns can be estimated. In order to avoid bottlenecks or other
difficulties, estimates for freight transport must be made well in advance of the actual
provision of supply. What is required for the Review Study is to give some idea of the
magnitude of the likely evolution of demand. The information on the trend of past demand
is used as far as possible to give a first indication of the future. There is some difficulty in
compiling a good database on the current passenger traffic and its trends, let alone in
forecasting. An alternative is also to compare simple estimates of traffic growth with
estimates produced by other similar and recent studies.
In order to keep pace with the growing economic activity, replacement of old fleet,
upgrading of trucking technology and expansion, is required to match with the pattern of
change in the nature of demand. Furthermore, measures to restrict import of used vehicles
and replacement with obsolete trucks will tend to reverse the present distribution of old
trucks. It is expected that there will be shift towards modern multi-axle trucks, which
currently account for a relatively low proportion of the trucking fleet. In order to have
sufficient number of modern multi-axle long haul age trucks, there has to be sustainable
increase in economic activity. Considering the strong positive performance of the Ethiopian
economy in recent years and taking into account that it is in the earlier stages of transition
to a full market economy, the increase in road freight transport fleet will be at a high rate.
The Transport sector has been increasing on average by 23.80% for the past five years.
Substantial increase was observed during 2001EC and 2002EC and 2004. During 1998EC,
the total amount contributed by the Transport sector was Birr 6.86 billion which was
increased to Birr 15.98 billion by the end of 2004EC. After the fall of the dergue regime,
several policy measures were taken and among others construction of new roads and
rehabilitation of the existing once by both federal and regional governments has enhanced
the sect oral contribution. Moreover the demand and supply gap analysis depicts that the
supply is in short of 749.88 million liters as of 2004 EC and this gap will reach 10.08 billion
liters by 2012EC if the trend continues in the same fashion.

1.2 Back Ground of the promoter

The promoter, Ato Yared Hadgu is engaged in dry fright transport by being registered
under trade license no. 14/665/393609/2006 dated 4/2/2007 with a paid up capital of
birr 1,787,374.00. In doing his business Ato Yared owns two trucks along with their
trailers.
1.3 The Current Undertaking
Cognizant to encouraging trends in the fright transport business coupled with the relatively
better economic growth of the country have initiated the promoter to invest in road
transport vehicle.
To realize his vision of expansion, the promoter has planned to purchase one more truck
with trailer from Baheran Trading P.L.C. with a cost of birr 4.2 million. In doing so, Ato
Yared has planned to request Bunna International Bank S.C. to cover 50% or birr 2.1
million of the project cost and the remaining 50% of the project from his own source.
1.4 Demand and Supply Gap
1.4.1 Dry fright Trucks with Trailers
The demand and supply gap exhibits that there is an excess demand of 56.89 Million
quintals in 2004 EC and this gap will reach 56.23 million quintals by the end of 2012EC.
Demand and Supply Gap of Dry Caro Trucks and Trailers in Million Quintals
Year

Supply

Demand

Gap

2004EC

361.5

418.39

(56.89)

2005EC

398.0

456.25

(58.25)

2006EC

438.2

497.54

(59.34)

2007EC

482.4

542.57

(60.17)

2008EC

531.2

591.67

(60.47)

2009EC

584.8

645.22

(60.42)

2010EC

643.9

703.61

(59.71)

2011EC

708.9

767.29

(58.39)

2012EC

780.5

836.73

(56.23)

1.4.2 Dry fright transport service market prospect

The leading transport mode in Ethiopia, as in most sub Saharan and African courtiers, is
road transport. This indicates that there is heavy dependence of the national economy on
this type of transport. Thus availability of efficient road transport service is crucial to all
other sectors of the economy.
As Ethiopia is among the fastest growing economies in the region has resulted in
progressive growth in the volume of import, consumable goods, fertilizers, and other
merchandize items. According to the World Bank report of 2010, the volume of import is
reached to 9.7 billion dollars with annual growth of 15% in the country. In addition, as a
result of continued effort to diversify the exportable items, the export volume of the
country is growing at an increasing rate. In connection with this, as the major part of the
countrys export is related to agricultural products, domestic agricultural production
performance of the country is growing continuously. In this regard, the world bank report
indicates that the countrys export value in 2010 was USD 3.4 billion with annual growth
rate of 14%. Due to the recurrent droughts faced by our country at different times, our
country has become one of the biggest recipients of food aid in the world. Mostly the food
aid is provided in the form of cereals and fright transport is the main means of transporting
the food aid to food insecurity affected areas. According to FAO, Ethiopia had received
804,000.00mt of food aid in 2009 alone. All the above economic as well as social changes
have brought a huge, continue, and increasing demand for transport service, especially dry
fright transport. As the nations economy persistently grows with double digit growth rate,
the specific sector in which Ato Yared Adegu is operating in is expected to grow robustly
over the years to come.
1.4.3 Fright transport operators
Different studies indicates that the number of privately owned fright transport operators
have been increasing parallel with economy activity growth of the country. For instance,
according to transport authority report, the number of dry cargo fleet is increased from
18,010 in 1999 to 23,724 in 2005 with an average annual growth rate of 4.5%. The report

also indicates that of the total number of dry cargo vehicles, about 22% were in range of
30-40 tone load capacity and operate on Addis Ababa Djibouti root .the cargo fleets are
owners with different number of vehicles.
2. Investment cost
2.1 Initial investment cost
Ato Yared Adegu has planned to purchase one truck with trailers form Baheran Trading
P.L.C. The caring capacity of the trucks is going to be 450 quintals each.
As per Performa invoice no. BT/149/14 dated December 4, 2014 from Baheran Trading
P.L.C. the price of the truck and trailer is birr 4,200,000.00 details of the Performa is
tabulated here under.
No. Description
1

Qty

New Trucker ATN 380T38H, 1

Unit Price

Total Price

3,350,000.00

3,350,000.00

850,000.00

850,000.00

4,200,000.00

4,200,000.00

Chassis Ero-3 Cap , 6*4

Wheelbase 4200+1380 MMS
For cargo Transportation ZF
Gearbox type ZF 16S 2220 to
no. 10+1
H.H. Engineering Trailer 3- 1
Axel dry cargo draw bar
trailer
Total Price( Including VAT)

2.2 Source of financing

The source of finance for the proposed investment will be both from bank loan and equity
contribution. It is planed that the promoter will cover 50 % of the investment while the
other 50 % is expected to be financed by Bunna International Bank S.C.
Proposed financial structure
Financing Structure
Item

Owners Equity

Debt Financing

Total

Truck with trailer

2,100,000.00

2,100,000.00

4,200,000.00

Total

2,100,000.00

2,100,000.00

4,200,000.00

50%

50%

Percentage contribution
Revenue projection

Revenue Projection for the truck with trailer proposed to be purchased

Income Per Trip

From Addis Ababa To Djibouti

58,000.00

From Djibouti to Addis Ababa

62,000.00

No of trips Per year assuming three round trips per month

3,384,000.00

Assuming income will increase by 20% every year, projected income for the next three
years will be as follows,
Expense projection

Salary and per diem projection and assuming this will increase by 3 % every year,

Description

Salary

per Per

month

diem Total expense per

per month

year

Driver

3,500

3,000

78,000

assistant Driver

1,500

1,500

36,000

Total

5,000

4,500

114,000

Fuel, Oil, & Lubricant is assumed to be 15% of the yearly total fright income,

Since the truck has 22 tires , it is assumed that it will require change of tiers once
for the first year and twice for the remaining three years,

Repair & Maintenance is assumed to be 1 % of the yearly total fright income,

Insurance Cost is assumed to be 2 % of the yearly total fright income,

Miscellaneous of birr 10,000.00 is assumed for each year,

Depreciation expense of 20% is calculated on the book value of the truck along
with its trailer,

Interest Expense of 15 % for five years on the recommended amount is calculated

on the principal outstanding balance of every ear.

Taking the above assumptions in to account, the following projected income statement
and cash flow statement for the next four years,

Yared Adegu
Projected Income Statement
Description/Year

Year-01

Year-02

Year-03

4,320,000

5,184,000

6,220,800

Salary & Wages

114,000

117,420

120,943

Fuel, Oil, & Lubricant

432,000

518,400

622,080

Tires (assuming it will change twice a year 22 Tires)

286,000

572,000

572,000

Repair & Maintenance

43,200

51,840

62,208

Insurance Cost

86,400

103,680

124,416

Miscellaneous

10,000

10,000

10,000

Depreciation

840,000

672,000

537,600

Interest Expense

306,377

204,170

84,314

Total Operating Exp.

2,117,977

2,249,510

2,133,561

Profit Before Tax

2,202,023

2,934,490

4,087,239

770,708

1,027,072

1,430,534

1,431,315

1,907,419

2,656,705

Revenue
Fright Income
Operating Expense

Provision For Tax

Profit After Tax

Yared Adegu
Projected Cash Flow
Description

Year-00

Own equity

2,100,000

Bank loan

2,100,000

Net profit

Depreciation

4,200,000

Fixed investment

4,200,000

Repayment

4,200,000

Net cash inflow

Year-03

1,907,419

2,656,705

840,000

672,000

537,600

2,271,315

2,579,419

3,194,305

591,910

694,117

813,973

591,910

694,117

813,973

1,679,405

1,885,301

2,380,333

1,679,405

3,564,706

5,945,039

Total cash outflow

Year-02

1,431,315

Total cash inflow

Cumm.net cash inflow

Year-01

3. Forecasted Financial Statement Results

3.1 Profitability
The business is assumed to generate of Birr 4.3 million in the first year and this is
expected to increase to Birr 6.2 million at the end of the third year. In the due course of
operation it is expected that the total operating cost would be Birr 2.11 million in the first
year of operation and this is expected to increase to Birr 2.13 million at the end of year
three. As a result, the net income before tax at the first year of operation of the
undertaking is expected to be Birr 2.2 million at the end of first year and increases to Birr
4 million at the end of the third year after deduction of operating expenses. After meeting
expected profit tax payments, the applicant has planned to generate a net profit of Birr
1.4 million in the first year and increases to Birr 2.6 million at the end of third year. It
shows that the business is envisaged to be profitable throughout its planned life.

3.2 Dept Paying Capacity

The projected cash flow reveals that the business generates adequate cash in meeting the
banks commitment in addition to operating expense and profit tax. The net cash inflow
would be around Birr 1.6 million in the first year and Birr 2.3 million at the end of the
projection year. This proves that the Undertaking would be capable of meeting bank
commitment as planned, keeping other factors unchanged.