AFC Consultants International

Egg Farm

TABLE OF CONTENTS

1 EXECUTIVE SUMMARY ..................................................................................... 2

2 PROJECT DESCRIPTION................................................................................... 2
3 PRODUCTION PROCESS................................................................................... 3
4 MARKET ANALYSIS .......................................................................................... 3
4.1 T ARGET MARKET.................................................................................................................................................. 4
4.2 SWOT ANALYSIS ................................................................................................................................................ 4
5 MARKETING PLAN............................................................................................ 4
6 FINANCIAL PLAN ............................................................................................. 5
6.1 INITIAL INVESTMENT............................................................................................................................................ 5
6.2 MAJOR ASSUMPTIONS........................................................................................................................................... 5
6.3 PROJECTED INCOME STATEMENT ......................................................................................................................... 6
6.4 PROJECTED BALANCE SHEET................................................................................................................................ 7
6.5 PROJECTED CASH FLOWS ..................................................................................................................................... 8
6.6 RATIO ANALYSIS .................................................................................................................................................. 8
6.7 BREAK -EVEN ANALYSIS ....................................................................................................................................... 9
6.8 SENSITIVITY ANALYSIS......................................................................................................................................... 9
7 RECOMMENDATIONS AND KEY SUCCESS FACTORS ....................................10
8 ECONOMIC IMPACT EVALUATION ................................................................10
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1 Executive Summary
The proposed project consists of establishing a chicken farm for egg production in Hermel. The
farm will provide quality free range eggs for the hermel caza and close vicinities. Traditionally,
Hermel eggs wholesalers and retailers used to buy their eggs’ needs from neighboring Syria.
However, with the rising costs of eggs in this market and the increasing transport costs, it has
become too expensive and unfeasible to continue the procurement from Syria. Hence, a new
farm would help to fulfill the needs of the caza for eggs.

The initial investment for the project is estimated at $421,100 which includes $10,000 in land
cost, $375,000 in construction costs, $19,100 in equipment, $12,000 in vehicle, and $20,000
in working capital.

The farm has a capacity for 10,000 chicks, which will produce an average of 9,250 eggs per
day after a cycle of 90 days. They continue production over a period of15 months before being
sold at a price of $0.7 each. Then the cycle is renewed for another 18 months.

The projections are taken over a period of 7 years. The farm is expected to provide a net
profit of $37,612 in year 1 and can reach up to $52,830 by year 7.

The internal rate of return (IRR) is 12% and the payback period, which is the period
necessary to pay back the investment, is 7 years and 9 months.

These results show that the project is feasible. The payback period and the IRR reflect the
importance of the investment, which should be considered as a long term investment that
provides satisfactory annual returns.

A worst-case scenario is taken by assuming that the price per 360-egg box is at $39
instead of $40. I n this case, the business will have a seven years average profitability of
$38,342 annually. The internal rate of return is 10%. The payback period is 8 years and 8
months.

A best-case scenario is taken by assuming that the price is increased to $41 per 360-eggs
box. In this case, the business will have a seven years average profitability of $52,058
annually. The internal rate of return is 14%. The payback period is 7 years.

The project will offer 2 job opportunities: one administrator and one worker. The project will
contribute to the region by providing quality eggs at competitive prices. The administrator will
handle the delivery of the eggs to wholesalers and retailers in the region.

2 Project description
The proposed project consists of establishing a chicken farm for eggs’ production in Hermel.
The farm will provide quality free range eggs for the hermel caza and close vicinities.

Traditionally, Hermel eggs wholesalers and retailers used to buy their eggs’ needs from
neighboring Syria. However, with the rising costs of eggs in this market and the increasing
transport costs, it has become too expensive and unfeasible to continue the procurement from
Syria. Hence, a new farm would help to fulfill the needs of the caza for eggs.

The farm will be built on a 2,000 m2 parcel of land. The total built-up area of the farm is
1,250 m2. The construction will take into consideration the light conditions in the farm as light
is very important in the setting up of a farm for layers. It has much to do in the maturation of
the growing layers and their capability to lay plenty of eggs.

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3 Production process
The production process starts at buying a stock of one-day old layers from breeder suppliers.
At arrival, chicks are either placed in typical layer pens or reared in a pullet house. At the
hatchery, chicks are vaccinated according to the producer’s specifications

Chicks placed in pullet houses are reared on a floor covered with absorbent materials, such as
pine shavings. During the first week, pullet chicks are usually beak trimmed. From chick
placement through approximately 90 days of life, the pullets are fed according to body weight
gain and/or age. Moreover, they are heated as shown in the below table. The goal is to raise a
strong and healthy bird that can support egg production.

Week Temperature
degrees (C)
1 32
2 30
3 27
4 24
5 22
6 throughout layer 22
cycle

Young birds are fed a high protein diet (20 percent) during the first few weeks of life. This
level continuously decreases until it reaches approximately 12 to 15 percent protein during
egg production.

After 90 days, the chicks would not require any heating. The farmer would just feed them and
give them vaccines twice over a period of 15 months. The total production cycle is 18 months.

At the end of the cycle, which extends over 18 months approximately, the hens are sold at
$0.7 to $1 each.

4 Market Analysis
There are around 2,000 farms in Lebanon producing 400 million table eggs per year.

There are 2 types of breeders:

· Layers: Chickens raised to lay eggs

· Broilers: Chickens raised for meat production.

Today, there is no breeder industry i n Lebanon. Producers import breeders mainly from
European countries. Tanmia imports breeders from its own company in Egypt.

Table eggs are sold in boxes containing 360 eggs. The estimated wholesale market size is
around USD 34 million.

Large players sell directly to:

· Large clients such as supermarkets, restaurants, hotels, etc...
· Individuals through their retail outlets

Small and medium size players go through wholesale companies and do not sell directly to
clients.

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Selling directly to large clients’ puts producers at risk as the economic recession is forcing
many businesses to close down. Payment terms are different for each client and range from 1
to 4 months

As for Hermel caza, there are no chicken farms for eggs as most wholesalers, retailers and
individuals had traditionally relied on buying the eggs from Syria. However, more recently,
prices have tremendously increased in Syria and the rising cost of fuel have made it unfeasible
to continue supplying the local market from Syria. Hence, it became logical to establish a local
egg production to meet the local demand in the caza and its vicinities.

4.1 Target market

The chicken farm for eggs will target the local retailers as well as wholesalers, and will offer
quality eggs at competitive prices.

4.2 SWOT Analysis

STRENGTHS
§ There is no similar project in the Hermel
caza. Hence, it will be filling a need in the
area.
§ T h e p roject ensures immediate returns.
Within a period 3 months, the laying
chicks start producing eggs.
WEAKNESSES
· Dealing with wholesalers and retailers
may require long payment terms,
which will squeeze the cash flows of
the company.

OPPORTUNITIES THREATS
§ The lack of egg farms in the region · The hens could be affected by diseases,
represents an important opportunity for for this reason, it is imperative that the
the project. In fact, local wholesalers and farm maintains a regular vaccination
retailers used to buy the eggs from schedule.
neighboring Syria. The rising cost of eggs · Production rates could be negatively
added to high transport costs is making it a f f e c t e d b y temperature extremes.
more difficult to continue obtaining Hence, the farm administrator should
supplies from this market. constantly maintain control on
temperature levels to ensure optimal
§ The increasing costs of feed, have been conditions.
matched by price increases in such a way
that the profit margins have been · The difficult economic situation in the
maintained at satisfactory levels in the country could affect the business,
business. especially with the diminishing
purchasing power of the population.

5 Marketing Plan
The egg farm will base its marketing strategy on the following:

· Establishing direct contacts with wholesalers in Hermel and Bekaa region and
eventually over all the Lebanese territory.

· Ensuring high quality eggs are delivered on a regular and consistent basis to
wholesalers and retailers.

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6 Financial Plan
This section details the calculations, assumptions and methodology used as a basis for the
projections of the expected financial performance of the egg farm.

6.1 Initial Investment

Investment Requirements
Items Unit cost Qty Total Cost (in $)
Land 5 2,000 $10,000
Construction of farm 300 1,250 $375,000
Egg laying boxes 60 120 $7,200
Feeders 12 200 $2,400
Automatic drinkers 18 500 $9,000
Packaging boxes (reusable) 2.5 200 $500
Vehicle 12,000 1 $12,000
Working capital $20,000
Total Investment Cost $436,100

The above table shows the various investments needed for the establishment of the egg farm.

The initial investment for the project is estimated at $421,100 which includes $10,000 in land
cost, $375,000 in construction costs, $19,100 in equipment, $12,000 in vehicle, and $20,000
in working capital. The farm’s capacity is for 10,000 laying hens.

6.2 Major assumptions

The assumptions are conservative and are based on achievable market levels.

The following table shows the main assumptions for the income statement. The cost of layer
chick (1-day old) is $0.85. The cost of feed + vaccine + heating for the first 90 days amounts
to $3.7 per chick. Following this period of 90 days, the chicks do not require heating anymore,
but would need vaccines for $0.24 and feed for $1.73 per month per chick.

The 10,000 laying hens produce an average of 9,250 eggs per day for a period of 13 months
out of a total production cycle of 18 months.

The price per box of 360 eggs (12 cartons of 30 eggs each) is currently at $40. The financial
plan takes into consideration annual increases in price of 2%.
The laying hens are sold at a price of $0.7 each after the 18-months cycle is over.

Income Statement Assumptions

Cost of layer chick (1 day old) $0.85 per chicken
Cost of feed+vaccines+heating (90 days) $3.7 per chicken
Cost of feed/chicken (over period of 15 months) $1.73 per month per chicken
Cost of vaccine per chicken $0.24 per the 15 months
Number of layer chicken 10,000
Quantity of eggs produced per day 9,500 eggs
Net production period out of a total of 18 months 13 months
Net production period 72.2%
Number of production days per year 260 days
Price per box (360 eggs) $40
Price increases 2% annually
Packaging cost $10.0 per 140 cartons
Price of chicken at end of 18 months cycle $0.7 per chicken
Transport costs 2.0% of sales
Annual increase in general expenses 2%
Dividends payout ratio (year 2 forward) 90%
Income Tax Rate (establishment) 2%

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The plant will have 2 employees, out of which is one administrator and one worker.
An annual increase in general expenses of 2% is taken into account to account for inflation
factors. The dividends payout starting in year 2 and forward will be paid at 90% of the net
profits.

Balance Sheet Assumptions

Accounts Receivable 2 months of sales
Inventory 2 months of cost of goods sold
Accounts payable 1 month of cost of goods sold

The farm’s accounts receivable are assumed to represent 2 months of sales and the inventory
to represent 2 months of cost of goods sold. The accounts payable are assumed to represent 1
month of cost of goods sold.

6.3 Projected Income Statement

Egg Farm
INCOME STATEMENT Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Sales 274,444 279,933 285,532 291,243 297,067 303,009 309,069
Sales of chicken at end of cycle 7,000 7,140 7,283 7,428 7,577 7,729
Total Revenues 274,444 286,933 292,672 298,525 304,496 310,586 316,798

Cost of layer chicks 8,500 8,670 8,843 9,020 9,201 9,385 9,572
Cost of feed + vaccine+ heating over 90 days 36,500 37,230 37,975 38,734 39,509 40,299 41,105
Cost of feed during the rest of the year 155,250 158,355 161,522 164,753 168,048 171,409 174,837
Cost of vaccine during rest of the year 2,400 2,448 2,497 2,547 2,598 2,650 2,703
Packaging costs 5,881 5,999 6,119 6,241 6,366 6,493 6,623
Transport costs 5,489 5,739 5,853 5,971 6,090 6,212 6,336
Labor cost 3,960 4,039 4,120 4,202 4,286 4,372 4,460
Administrator salaries 4,800 4,896 4,994 5,094 5,196 5,300 5,406
Other charges 500 510 520 531 541 552 563
Depreciation 12,785 12,785 12,785 12,785 12,785 11,285 11,285
Total expenses 236,065 240,670 245,228 249,877 254,619 257,956 262,889
Earnings before tax 38,380 46,263 47,444 48,648 49,877 52,630 53,909
Tax 768 925 949 973 998 1,053 1,078
Net profit (loss) 37,612 45,338 46,495 47,675 48,880 51,578 52,830
Net profit margin 13.7% 15.8% 15.9% 16.0% 16.1% 16.6% 16.7%

The income statement shows satisfactory income levels with a seven-year average net profit
margin of 16%. Of course, these results will depend on market conditions and the ability of
the owners/administrator to carefully manage the operations and especially costs and
operating charges. The company reaches a net profit that exceeds $52,000 in year 7.

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6.4 Projected Balance Sheet

The balance sheet shows the projected assets and liabilities of the company.

Egg Farm
BALANCE SHEET Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Assets
Cash and banks 16,703 31,781 48,097 64,508 81,017 96,273 111,630
Accounts receivable 45,741 47,822 48,779 49,754 50,749 51,764 52,800
Inventory 25,331 25,838 26,355 26,882 27,419 27,968 28,527
Total current assets 87,775 105,441 123,230 141,144 159,186 176,005 192,957
Land 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Construction 375,000 375,000 375,000 375,000 375,000 375,000 375,000
Equipment 19,100 19,100 19,100 19,100 19,100 19,100 19,100
Vehicle 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Accumulated depreciation 12,785 25,570 38,355 51,140 63,925 75,210 86,495
Net Fixed Assets 403,315 390,530 377,745 364,960 352,175 340,890 329,605
Total assets 491,090 495,971 500,975 506,104 511,361 516,895 522,562

Liabilities & Owners' equity

Accounts payable 17,378 17,725 18,080 18,441 18,810 19,186 19,570
Current liabilities 17,378 17,725 18,080 18,441 18,810 19,186 19,570
Capital 436,100 436,100 436,100 436,100 436,100 436,100 436,100
Retained earnings 37,612 42,146 46,795 51,563 56,451 61,609 66,892
Owners' equity 473,712 478,246 482,895 487,663 492,551 497,709 502,992
Total liabilities & owners' equity 491,090 495,971 500,975 506,104 511,361 516,895 522,562

STATEMENT OF RETAINED EARNINGS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Retained earnings at 1 January 0 37,612 42,146 46,795 51,563 56,451 61,609
Net profit (loss) for the year 37,612 45,338 46,495 47,675 48,880 51,578 52,830
Dividends 40,804 41,845 42,908 43,992 46,420 47,547
Retained earnings at 31 December 37,612 42,146 46,795 51,563 56,451 61,609 66,892

The company is expected to start distributing dividends starting in year 2 a t $40,804 and
$47,547 by year 7.

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6.5 Projected Cash Flows

The following table shows the projected cash flows of the project.

Egg Farm
STATEMENT OF CASH FLOWS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Net income 37,612 45,338 46,495 47,675 48,880 51,578 52,830

Adjustments to reconcile net income
to cash provided by operating activities
Depreciation 12,785 12,785 12,785 12,785 12,785 11,285 11,285
Changes in receivables (45,741) (2,081) (956) (976) (995) (1,015) (1,035)
Change in inventories (25,331) (507) (517) (527) (538) (548) (559)
Change in payables 17,378 348 355 362 369 376 384
Total Adjustments (40,909) 10,544 11,666 11,644 11,621 10,098 10,074
Cash provided by operating activities (3,297) 55,882 58,161 59,319 60,501 61,676 62,905
Cash Flow from Investing Activities
Capital expenditures
Investment in fixed assets (416,100) - - - - - -
Net cash used in investing activities (416,100) - - - - - -
Cash flow from financing activities
Capital injection 436,100
Dividends distributed (40,804) (41,845) (42,908) (43,992) (46,420) (47,547)
Cash provided by financing activities 436,100 (40,804) (41,845) (42,908) (43,992) (46,420) (47,547)

Cash at beginning of year - 16,703 31,781 48,097 64,508 81,017 96,273

Changes in cash 16,703 15,078 16,316 16,411 16,509 15,256 15,357
Cash at end of year 16,703 31,781 48,097 64,508 81,017 96,273 111,630

The projected cash flows show the initial net investment in the land, construction and
equipment in year 1, which are financed by capital injection of $436,100.

In year 1, the farm starts making profits. The business is able to start distributing dividends
by year 2.

6.6 Ratio analysis

The following table shows the main financial ratios for the Corn fermentation plant.

Ratio Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Liquidity Ratios
Current Ratio 5.1 5.9 6.8 7.7 8.5 9.2 9.9
Working Capital 70,397 87,716 105,150 122,703 140,376 156,819 173,387
Profitability Ratios
Net Profit Margin 13.70% 15.80% 15.89% 15.97% 16.05% 16.61% 16.68%
Financial Strength
Total Debt to Owners' Equity 3.7% 3.7% 3.7% 3.8% 3.8% 3.9% 3.9%
Management Effectiveness
Return on Assets 7.7% 9.1% 9.3% 9.4% 9.6% 10.0% 10.1%
Return on Equity = ROE 7.9% 9.5% 9.6% 9.8% 9.9% 10.4% 10.5%
Return on Investment = ROI 9.3% 11.6% 12.3% 13.1% 13.9% 15.1% 16.0%
Asset Management (Efficiency)
Total Assets Turnover: Sales/tot assets 0.56 0.58 0.58 0.59 0.60 0.60 0.61
Working Capital Cycle
Days Sales Outstanding 60 60 60 60 60 60 60
Days of inventory 45 45 45 45 45 45 45
Days of payables 30 30 30 30 30 30 30
Working Capital
Turnover=Sales/Working Capital 3.9 3.3 2.8 2.4 2.2 2.0 1.8

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The current ratio, which is computed by dividing current assets by current liabilities, shows
increasing and high levels throughout the years. The working capital is positive in all the
years, confirming the ability of the company to meet its short term liabilities.

The net profit margin increases from a level of 13.7% and reaches 16.7% by year 7.

The return on average assets, which is computed by dividing net profits by total assets, shows
how much profit the company is able to achieve from the use of its assets. This ratio has an
average of 10% over the 7 years.

The return on average investment shows healthy levels fueled by the growth in profitability.
The average return on investment is around 14%.

The total assets turnover shows how well the management is making use of its assets. The
assets turnover is computed by dividing sales over total assets. The company has a relatively
high investment in fixed assets due to the construction budget for the farm.

The days of receivable are at 60 days, i.e. 2 months of sales, the days of inventory represent
45 days of cost of goods sold and the days of payables represent 1 month of cost of goods
sold.

6.7 Break-even analysis

The following table shows the annual revenue levels needed for the business project to break
even. Thus, an average of $17,028 in year 1 is a minimum level for the egg farm to break
even.

Chicken Farm For Eggs

Break-even Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Total Revenues 274,444 279,933 285,532 291,243 297,067 303,009 309,069

Total Variable Costs 60,330 60,172 61,375 62,603 63,855 65,132 66,435
Total Fixed Costs 13,285 13,295 13,305 13,316 13,326 11,837 11,848

Break-even Revenues 17,028 16,935 16,948 16,961 16,975 15,078 15,092

6.8 Sensitivity analysis

The internal rate of return (IRR) is 12% a n d t h e payback period, which is the period
necessary to pay back the investment, is 7 years and 9 months.

These results show that the project is feasible and provides satisfactory returns.

A worst-case scenario is taken by assuming that the price is at $39 instead of $40 per 360-
egg box. In this case, the business will have a seven years average profitability of $38,342
annually. The internal rate of return is 10%. The payback period is 8 years and 8 months.

A best-case scenario is taken by assuming that increase in price from $40 to $41 per 360-
egg box. In this case, the business will have a seven years average profitability of $52,058
annually. The internal rate of return is 14%. The payback period is 7 years.

Sensitivity Analysis Worst-case Most likely Best-case

Average net income $38,342 $45,200 $52,058
Average net profit margin 14% 16% 18%

Internal rate of return (IRR) 10% 12% 14%

Payback period in years 8 years and 8 months 7 years and 9 months 7 years

These results show that the project is feasible and provides satisfactory returns to its
shareholders.

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7 Recommendations and key success factors

In order to achieve satisfactory results, the following recommendations should be taken into
consideration:

· Keeping hens healthy: A hen that is healthy and not badly stressed will be resistant to
infection by Salmonella bacteria.
· Maintaining optimum temperature and air quality in the farm.
· Ensuring that the water supply is clean and uncontaminated.
· Hens should not be overcrowded.
· Monitoring feed and water consumption closely to be able to identify and deal with a
disease outbreak as soon as possible.
· Maintaining good biosecurity, e.g., keeping birds, animals and unauthorized people
out of the layer house. Farm workers should avoid contact with poultry other than
birds in the farm flock.
· Keeping the farm clean: A farm that is clean and free of vermin will harbor fewer
Salmonella bacteria and present fewer opportunities for contamination of eggs.
· Manure should not be allowed to build up on dropping boards. Dropping should fall
freely away from cages to minimize the number of eggs soiled by fecal materials.
· Scraping or washing dried yolk from broken eggs.
· Handling eggs properly: Fresh, whole eggs contain natural resistance factors that
inhibit bacterial growth if the eggs are kept cool.
· Collecting all eggs promptly, especially in hot weather as eggs easily spoil in a warm
surrounding
· Handling eggs carefully to minimize cracks.
· Layers will lay eggs regularly if they are kept away from noise and disturbances.

8 Economic Impact Evaluation

The project will offer 2 job opportunities, of which is one administrator/driver and one
worker. The project will contribute to the general enhancement of socio-economic
environment in the caza and will help to provide quality fresh eggs at competitive prices.

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