37490965 adline-paultry-project

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  • 1. A PROJECT PROPOSAL ON A BROILER POULTRY PROJECT IN AT PLOT 18 KUDYARAWADZA COMMUNAL LANDS SEKE A PROPOSAL SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE POST GRADUATE DIPLOMA IN PROJECT PLANNING AND MANAGEMENT ADMORE CHAKADENGA R979351A DEPARTMENT OF RURAL AND URBAN PLANNING FACULTY OF SOCIAL; STUDIES UNIVERSITY OF ZIMBABWE 1
  • 2. Contents Contents......................................................................................................................................................2 Chapter 1.....................................................................................................................................................5 INTRODUCTION.......................................................................................................................................5 1.1 BACKGROUND ...............................................................................................................................6 1.2 JUSTIFICATION OF THE PROJECT....................................................................................................6 1.3 GOAL OF THE PROJECT ..................................................................................................................7 1.4 PURPOSE/OBJECTIVES ..................................................................................................................7 Chapter 2.....................................................................................................................................................7 Project description...................................................................................................................................8 2.1 Overview of the project.................................................................................................................8 2.2 PROJECT LOCATION .......................................................................................................................8 2.3 INSTITUTIONAL AND ENVIRONMENTAL SETTING..........................................................................8 Chapter 3...................................................................................................................................................10 PROJECT DESIGN....................................................................................................................................10 3.1 Project planning ..........................................................................................................................11 3.2 The project life ............................................................................................................................12 3.3 Type of feeding............................................................................................................................13 3.4 Fowl runs.....................................................................................................................................14 3.5 Brooder........................................................................................................................................14 3.6 Watering and Feeding..................................................................................................................15 3.7 Vaccination .................................................................................................................................15 3.8 Insect and pest control................................................................................................................15 3.9 Lighting........................................................................................................................................15 3.10 Preventing diseases...................................................................................................................16 3.12 Organizational design ................................................................................................................16 3.12.1Procurement unit.....................................................................................................................16 CHAPTER 4 ................................................................................................................................................21 PROJECT APPRAISAL..............................................................................................................................21 4.1Capital expenditure......................................................................................................................21 4.2 A T35 truck ......................................................................................................................................21 4.3 DEPRECIATION.................................................................................................................................21 2
  • 3. 4.4 Operating Expenses per batch (capitalized).....................................................................................22 4.5 Revenues .........................................................................................................................................23 4.6 Depreciation....................................................................................................................................24 4.7 Project financing..............................................................................................................................24 4.8. MEASURES OF PROJECT WORTH ....................................................................................................24 4.8.1 Profit and loss statements........................................................................................................24 Chapter 5 ..................................................................................................................................................29 CONCLUSION ........................................................................................................................................29 RECOMMENDATIONS...........................................................................................................................29 3
  • 4. Dedication I dedicate this project paper to my daughter Tafadzwa and my son Tapiwa. Children when you grow up I know you will be able to produce better work 4
  • 5. Acknowledgements I would like to thank all the people who supported and provided me with all the information necessary for the completion of this proposal. Special thanks go to the production unit manager at Crest breeders for providing important technical information that was used to make this document a possibility. Grace a fellow student who was formerly employed at crest breeders also helped me very much with the technical detail pertaining to poultry rearing. Marketing officers at National foods and sales staff at Hubbard were very generous by proving information on the ordering requirements and the lead time required. I thank my lecture Mr Muromo for his supervision which made this proposal a possibility Chapter 1 INTRODUCTION This chapter provides background information to setting up a broiler project. It focuses on project justification, goal and objectives. Broiler project generally are considered to be low 5
  • 6. capital, fast turnover enterprises. Poultry production in Zimbabwe plays a pivotal role in food security, income generation, export earnings, employment creation and generally in economic development. 1.1 BACKGROUND In Seke communal lands , farmers concentrate in maize and vegetable production, however they are not able to get sustainable returns as they have sandy soils which do not result in maximum output production. Backyard poultry are an important source of income for many rural households in Africa. Poultry production in most developing countries is based mainly on open scavenging systems. These scavenging systems have low inputs and result in low output which is mainly attributed to high mortality of chickens resulting mostly from malnutrition of the chickens, predation, accidents and proximity to diseases. Approximately 20% of the protein consumed in developing countries originates from poultry. However poultry production in Zimbabwe has declined drastically as the land as most whites who were in poultry production have left the country. This has resulted in households finding it cheaper to import GMO chicken from as far as South Africa a situation that is not sustainable given the scarcity of foreign currency. 1.2 JUSTIFICATION OF THE PROJECT The plan is to run an intensive poultry project which will not only benefit the promoters financially but also will have a great developmental effect in that other plot holders surrounding will also be encouraged to replicate the concept thereby broaden their income sources. In most rural households poultry is ranked amongst the primary income earners though rural farmers have not been able to tap into this lucrative livelihood. This project is socially desirable in that it will create employment for at least 5 people. The surrounding communities will also benefit from skills transfer and they might also replicate the concept a scenario which will result in improved household livelihood security. The use of poultry manure will also result in increased crop production. Above all it will help provide the Zimbabwean population with protein which is an important dietary requirement. The project will help preserve the much needed foreign currency in that it will contribute towards reducing importation of chicken mainly from South Africa. The economic meltdown has seen production of chickens by major producers like crest breeders, Sun crest chickens and Charles Stuart falling significantly. Individual producers are 6
  • 7. also failing to cope with the demand a scenario which have driven the prices to as high as $4 per KG. Zimbabwe has been a major supplier of meat to countries in the region and beyond. Compared to cattle and pigs, chickens have a shorter production cycle making it a fast and convenient method for income generation. 1.3 GOAL OF THE PROJECT To provide the Chitungwiza and Harare a reliable source chicken meat 1.4 PURPOSE/OBJECTIVES • To generate income for the Chakadenga household. • keep at least 6 batches of 10 000 chicken per annum averaging 1.5 Kg • To provide employment to the unemployed youth within the locality • To encourage other farmers in the area to replicate the idea and generate more income on their plots. Chapter 2 7
  • 8. Project description 2.1 Overview of the project The project is based on the rearing of broilers on a continuous basis with a flock size of 10 000 per batch to be marketed through own transport two shops to be established in Chitungwiza and Harare city center. The project will run for 10 years after which expansion into layers production will be considered. The project will have two fowl runs and a single brooder fitted with electricity for lighting and heating. Chicks will be obtained from Hubbard breeders. An annual output of 60 000 broilers is expected to be marketed. The farmer will embark on the project with the aid of a loan to be sourced from sourced from the Small Enterprises development corporation 0f USD 150 000. 2.2 PROJECT LOCATION Adline Poultry Project is a venture that planned to be implemented on plot number 45 which owned by Admore Chakadenga in Seke District near Dema growth point. The plot is electrified a development which makes make it suitable for poultry in that chickens can feed day and night. There is also a good gravel road which links the project site to the Dema Harare Highway. Adjacent to the plot there is a borehole which can be used as reliable water all year round. Construction of fowl runs can be done at reasonable as most materials can be sourced locally. The farmer has secured a 99 year lease from the government which can be used as collateral security for any finances which might be required for the project. The farm is an isolated area and there is no other poultry facility nearby that may contaminate the project which makes it easier for dieses control. 2.3 INSTITUTIONAL AND ENVIRONMENTAL SETTING The project relies on its environment for raw materials, resources and support (inputs) and the market for disposal of produced output. The poultry project will therefore be dependent on other institutions for the successful implementation, which is for professional advice, training, marketing and inputs. The project is located closer to Harare which minimizes transport costs of both chicken feed and broilers to the market. 8
  • 9. Politicians and community leaders For the project to be a success there is need for a buy in from politicians and community leaders especially in Zimbabwe where the laws of investment are not upheld and the government is unpredictable mostly on land ownership. Political influences in this project will militate against risks and uncertainty. Political influence may also help in securing the initial loan which is key to getting this project started. Veterinary officers and ARE officers will be very useful in vaccination programs and provide technical advice as and when required. They are government employees who provide technical advice for no additional fee. Success of poultry farming depends on proper management, housing and health so that losses are kept to the minimum. Community health workers will be use useful when it comes to sighting the fowl runs and advising on the best ways for solid and liquid waste disposal. Donors and Financial institutions Small Enterprises Development Corporation (SEDCO) – a financial institution where the project proposal will initially be submitted for funding This institution has favorable interest rates compared to banks. The proposal will however be presented to all other financial institutions and donors for financial support should SEDCO not finance. Other farmers- will benefit from skills transfer and may also replicate the idea. Mr. Chakadenga will act as a led farmer so other farmers can replicate the idea and earn more Agrifoods / national foods– will be important for the supply of poultry feed in form of starter mash, grower mash and finisher as a there phase feeding program is planned for the project Fig 1 PARTICIPANT ANALYSIS Veterinary Officers Agrifoods/ National Foods Suppliers of feed 9
  • 10. Local Authority Architects/builders Project Directors/ Promoters Community Health workers Adline poultry project Politicians SEDCO Hubbard group suppliers of chicks AREX /Officers Village Development Committee Chapter 3 PROJECT DESIGN This chapter will focus on project design one of the most important components of project planning. It helps establish programs to be undertaken in the project, gives detail of activities and also the allocation of responsibilities. It also gives detail of personnel provides information on personnel and technical inputs. 10
  • 11. 3.1 Project planning The logical framework approach will be used for planning the poultry project. It was seen necessary to adopt this approach for it provides a clear statement of why a project is undertaken, also clearly outlines the social, economic and physical environment. It also shows are project goal, objectives outputs and impacts are logically related. Fig xx shows the logical framework Project summary Objectively Means of External factors verifiable verification assumption Sales reports The current stable Arex reports economic indicators Goal • To the More people have provide Zimbabwean nation with a regular access to sustainable cheap source chicken meat environment will be chicken meat experienced though out the project life Objectives • To generate income for Amount of profit Chakadenga generated the statements households • Profit and loss Number of To market at least 60 000 households Sales and an reporting access average of 1.5 kg live chicken meat distribution weight per annum Weighing chicken weighing reports schedules and reports To provide employment Number of people Staffing levels reporting the • reports poultry project changed their life Number of people employed • All chickens put on the market are bought To encourage other Number of farmers 11 Arex reports Other farmers in the area will replicate the idea
  • 12. farmers in the area to who replicate the replicate the idea and same idea generate more income on their plots Outputs • Fowl runs constructed • 10 000 broilers released a brooder Number of birds on the per cycles • Manure Activities Two fowl runs and Mortality will be 1% released Number of fowl • Construction of fowl runs runs constructed • Recruitment of workers Number of • Vaccination of chicks • Brooding • Marketing and distribution • Site plan Sales reports employees hired Quantity of feed acquired Number of chicks Procurement of stock feed acquired per week and chicks Number of Vaccination Incidences and nature disease Suppliers of stock do not have times when they can’t supply Number of chicks vaccinated vaccination programmes administered 3.2 The project life The project is expected to last for 10 years in line with the life of the fowl runs after which major repair work and replacement of feeding plus dinking troughs is expected to be carried out. At the end of year ten it is assumed that all assets will be scraped at zero residual value. Over a period of 10 years (6 batches of 10 000 chickens) 60 000 chickens will be kept per annum. Over the project life a minimum of 600 000 broilers are going to be raised and sold at a minimum weight of 1.5kg each. The project has the potential to accommodate more than six batches per annum but for evaluation purposes 6 batches of 10 000 chickens per annum was selected. 12
  • 13. 3.3 Type of feeding Four phase feeding will be applied to ensure maximum output. Feeding with chicken feed purchased from National Foods or Agri Foods is thought to be a cheaper option for commercial purposes compared to feeding with concentrates which might result maturity periods of more than six months. Table 1 Estimated average growth rate and feed consumption rates per broiler Week Age Average weight 1 1-7 days 2 8-14 days 3 15-21 days 4 22-28 days 5 29-35 days 6 36-42 days Weekl y feed 0.1 Cumulative Feed Consumption Pre0.1 0.12 starter 0.3 0.3 0.37 starter 0.6 0.4 0.78 Grower 0.9 0.6 1.33 Grower 1.1 0.7 2.01 Finisher 1.5 0.8 2.82 Finisher Source Arbor acres broiler Feeding and Management manual To maturity each broiler is expected to weigh on average 1.5 kg and will consume 2.82kgs of feed. The prices of this feed was been observed to be the same for the different types of feed from National foods Weeks 1 and 2 will be the brooding phase; during this time chickens will be kept in a brooder where temperatures are regulated Fig 2 summarizes the feeding cycle for a single batch of broilers which are expected to put on the market in six weeks 13
  • 14. Souce: Khula Sizwe website 3.4 Fowl runs Two fowl runs will be constructed. Each fowl run will accommodate will have the capacity to accommodate 5000 chickens. On average 10 chickens will be accommodated per m2. In these fowl runs an average temperature 18 degrees Celsius will be maintained to ensure maximum results. For good aeration and ventilation the fowl runs will have two a small brick wall 30cm high and the rest will be mesh wire. The barns will elongate in an east west direction in order to avoid the direct hot sun. The deep litter system will be used in the housing system. Asbestos will be used for roofing. 3.5 Brooder One brooder with a central heating system will be constructed. 14
  • 15. 3.6 Watering and Feeding In the first two weeks it will be ensured that at least 4 liters of water will be provided for 100 chicks. After two weeks water will be changed from jugs to automatic waters ensuring that all birds have access to adequate clean water. 50 chicken per drinker, 70 chicken per feeding tough will be maintained on average. 2-2.5 cm space per bird A least 2cm feeder space will be allowed per bird. The feeding and drinking toughs will be properly adjusted on litter chickens grow. In total 200 feeders and 200 drinkers will be required so that an average of 50 chickens per drinker and per feeder is maintained. The drinkers and feeders will be circular with a circumference of at least 135cm. 3.7 Vaccination Water vaccines will be used in the project. Vaccination programmes will be administered in collaboration veterinary officers in the area as follows; castle 1 day old chicks – vaccinated against new 3 days vaccinated against infectious diseases using IDH 120 vaccine 1000 d0ses per thousand birds. 5 days olds vaccinated against coccidiosis paracox vaccine is administered Thereafter disease outbreaks will be controlled as there are indicators of dieses outbreaks 3.8 Insect and pest control 1.9x2.5 cm mesh wire will be used on poultry houses to keep out wild birds and predatory animals. Once there is evidence of rats and mice bait stations will be set at the back fowl runs to minimize lose due to these rodents. Each chicken house after the six weeks period will be allowed three weeks down time during which fumigation will and thorough cleaning will be done. During the down time the rearing sheds and brooder will be disinfected with hypo chloride and pesticides. 3.9 Lighting To ensure that the chicken mature at six weeks and are ready for the market, 24 hour feeding will be necessary therefore fowl runs will be fitted with florescent lights using the principle of 2.7 warts per square meters. 15
  • 16. 3.10 Preventing diseases When entering or leaving the each poultry house. The will be a pool of hypo chloride that visitors sanities their feet and vehicles when entering or leaving the project. The project will be fenced using barbed wire to prevent unwanted visitors who may act as agencies for dieses. Litter will be turned on a daily basis to prevent it from getting caked which result in excessive moisture a scenario which might result in acute respiratory diseases. 3.12 Organizational design The project organizational will be as follows. Project promoters are the Chakadenga family who conceived the project idea. The promoters will be responsible for ensuring that the requisite financial resources required for the project are mobilized To promote efficiency and effectiveness the project is three main functions; 3.12.1Procurement unit This unit will be responsible for ensuring that chicken feed, vaccines, the chicks and all consumables required for the day to day implementation of the project are procured timely of the smooth running of the project 3.12.2 Production Unit: headed by the production supervisor. This unit will ensure that the chickens are maintained and well fed. The production manager will also liaise with the local veterinary officers to ensure that vaccination programs are administered timely to minimize loss due to mortality. 3.12.3 Marketing Unit – this will be a ne man unit manned by a qualified marketing officer and experienced officer to ensure that all output is sold at competitive price The will project have the following organizational chart 16
  • 17. Promoters Project manager Procurement Production Unit 1 person Unit Marketing and sales 1 person General hands 4 people Work break down structure Activity Code Clearing Fencing A B Preceeding Activity _ A Succeeding Activity BC D 17 Duration 1 Week 1 Week
  • 18. Obtaining a site plan Construction of fowl runs Construction of brooder Recruitment Ordering of feed Ordering of chicks Brooding (Pre starter mash) Brooding (Starter mash) Vaccination Growers Finishing Marketing C A D 1 Week C DFGH 8 Weeks C C C I I IK 7 Weeks 2 Weeks 1 Week DFGH J 1 Week I L 1 Week DFGH J N J M J M N M _ 1 Week 1 Week 2 Weeks 2 Weeks 2 weeks D E F G H I J K L M N From critical path analysis the critical path of the pre implementation and implementation of the first phase was found to be 26 weeks long. 18
  • 19. Gant Chart For The Poultry Project Up To First Year Of Production Clearing Fencing Obtaining a site plan Construction of fowl runs Construction of brooder Recruitment Ordering of feed Ordering of chicks Brooding (Pre starter mash) Brooding (Starter mash) Vaccination Growers Finishing Catching Slaughtering Marketing P R O J E C T Pre launch phase 17 weeks 19 L o u n c h 1 2 3 4 5 6 8 weeks cycle for 10 000 chickens 7 8
  • 20. The 8 weeks cycles will be repeated at least 6 times per annum. Though out the project life there will be at least 60 cycles of 10000 chickens per batch. National foods have indicated they require an order to be made 6 weeks before delivery of feed. They indicated that cash should be paid on delivery. Hubbard group suppliers of chicks have also indicated that they will need an order to be made 5 weeks before delivery. So an order will be placed in the fifth week before commencement of the 8 weeks cycle 20
  • 21. CHAPTER 4 PROJECT APPRAISAL This chapter analyses the poultry project to establish project viability. Since the project will be financed largely by a loan from SEDCO there is need to ensure that the project is viable and will be able pay back the loan. Project appraisal is crucial so that resources are allocated to a project that will yield a profit Profitability of a business is established by comparing revenues to costs. Discounted techniques such as the NPV, IRR, and BCR will be used to assess the project worth. The income statement will also be used to measure the profitability of the project. 4.1Capital expenditure Construction of two by 500m2 rearing sheds and a brooder $5000 Fencing- around the stand to ensure isolation Barbed wire, poles and installation this $600 will be contracted to Selwire PVT Limited Cost of equipment for 10.000 birds including automatic watering system. $4000 T35 truck (includes import duty ) from Mazda South Africa 20,000 4.2 A T35 truck A T35 truck will be used for transportation of chicken to the abattoir and to the market. It will also be used for the transportation of feed from national foods to the plot in instances where less than 18 tones are purchased. At the end of year 10 the truck will also need replacement. South Africa was chosen for the truck to minimize the lead time. 4.3 DEPRECIATION Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors. There are various methods that are used for depreciating assets which include the straight-line method, sum of digits, reducing balance method and machine hour method. For the 21
  • 22. purposes of this project depreciation shall be charged using the straight line method over 10 years and no scrap value shall be salvaged at the end of the project. Therefore depreciation shall be charged at 10% per annum with a zero scrap value at the end of the project as follows Table 2 Annual depreciation charge schedule ASSET COST ANNUAL DEPRECIATION 10% T35 truck 20 000 2000 4000 400 10 000 1000 1000 100 Feeders, Drinkers Shed & Brooder Fencing Total Depreciation 3500 per annum 4.4 Operating Expenses per batch (capitalized) Cost of feed per batch $15542 Initial Cost of chickens capitalized (50 dollars per 100) for 10 000 $5000 Cost of electricity and overheads per bird $0.05 per bird $500 Cost of water vaccines per batch $500 Table 3 calculation of total cost of feed cost per batch of 10 000 chicken Week Age Feed Required per Bird kg Type of feed 22 Total feed required per batch Total cost of feed per batch US $
  • 23. kgs 1 1-7 days Pre0.122469 starter 1225 673.58115 2 8-14 days 0.25401 starter 2540 1397.0572 3 15-21 days 4 22-28 days 0.403695 Grower 0.557916 Grower 0.961611 4037 5579 9616 5 29-35 days 6 36-42 days 0.671313 Finisher 0.816462 Finisher 1.487775 6713 8165 14,878 2220.32305 3068.53635 5288.8594 0 3692.2226 4490.541 8182.7636 2.825866 28,259 Total for 10,000 chickens 15,542 Each bird requires a total of 2.825 kg of feed to grow to maturity. The price of all the four types of feed require was found to be US$0.55 per kg 4.5 Revenues Revenue will be realized from sales, the price of chicken on the market is USD$3.5 per kg. On average the birds will weigh 1.5 kg at maturity though there are chances that some might even weight kg. To be prudent the average will be used in the calculation of revenue 1.5 kg x $3.5 x 10000= 52 500 per batch is expected to be realized Offal Gizzards and livers- 20 birds produce a kg 10 000/20 x $1.50 per kg= $750 23
  • 24. 4.6 Depreciation Wear and tear of the brooder and the shade shall be provided at a rate of 10% per annum on a straight line basis. At the end of year 10 it is anticipated that major repair work will need to be done on the rearing shed and the brooders. It is also anticipated that the feeders, drinkers and automatic watering system will need replacement. 4.7 Project financing The current rate for long term loans is 24% per annum. The promoters also have disposed a house which have raised US$115 000. The promoters will seek a loan of 50 000 USD from the infrastructure development bank. 4.8. MEASURES OF PROJECT WORTH Discounted and undiscounted measures of project worth will be used to evaluate the project 4.8.1 Profit and loss statements A project is desirable if it is able to generate a profit from operation. 24
  • 25. Projected income statements for the project for the project Years Chicken sales Offal sales Total revenue Operation costs Chicken feed 14.878 metric tones per batch Cost of Chicks Electricity Overheads Fuels and oils Interest repayment on loan Slaughter services Depreciation- See Schedule Total costs Net profit 1 2 3 4 5 6 7 8 9 10 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 315000 4500 319500 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 92712 30000 1200 18888 3600 27750 9750 0 0 0 0 0 0 0 0 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 3500 192650 3500 171150 3500 161400 3500 161400 3500 161400 3500 161400 3500 161400 3500 161400 3500 161400 3500 161400 158,100.00 158,100.00 158,100.00 158,100.00 158,100.00 126,850.00 148,350.00 158,100.00 158,100.00 158,100.00 25
  • 26. Discount factor Since the loan that the promoters hope to acquire has an interest rate of 24%, this shall be used as a discount rate to determine the viability of the project. Table 4 discounting project costs and benefits at 24% and computation of NPV Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Costs 35000 264150 246150 161400 161400 161400 161400 161600 161600 161600 161600 Benefits 0 319500 319500 319500 319500 319500 319500 319500 319500 319500 319500 Discount factor 24% 1 0.8065 0.6504 0.5245 0.423 0.3411 0.2751 0.2218 0.1789 0.1443 0.1164 Total Discounted Costs 35000 213036.975 160095.96 84654.3 68272.2 55053.54 44401.14 35842.88 28910.24 23318.88 18810.24 767,396.36 Discounted benefits 0 257676.75 207802.8 167577.75 135148.5 108981.45 87894.45 70865.1 57158.55 46103.85 37189.8 1,176,399.00 Present value -35000 44639.775 47706.84 82923.45 66876.3 53927.91 43493.31 35022.22 28248.31 22784.97 18379.56 409,002.65 4.8.2 BENEFIT COST RATIO (BCR) BCR is the ratio of the total present value of benefits during the service life of the project to the total present value of the costs .A project is accepted for investment if BCR is greater than or equal to 1 and rejected otherwise Discounted project benefits: discounted project costs 767,396.36 / 1,176,399.00= 1.53 which means the project is viable since the benefit cost ratio is greater than 1 26
  • 27. 4.8.3 NET PRESENT VALUE (NPV) The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. Formula: Where Ct= cash flows at time t Co= initial investment r= discount rate NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. A project is desirable if it has a positive NPV. From table 4 above the net present value was found to be US$409,002.65 which is positive. This means that the project is viable. 4.8.4 INTERNAL RATE OF RETURN (IRR) Internal Rate of Return (IRR) is the discount rate that generates a zero net present value for a series of future cash flows. This essentially means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or an investment) equal its current market value. Internal Rate of Return provides a simple ‘hurdle rate’, whereby any project should be avoided if the cost of capital exceeds this rate. 27
  • 28. Table 5 discounting project cash flows at 250% per annum (yields a negative NPV) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Costs 35000 264150 246150 161400 161400 161400 161400 161600 161600 161600 161600 IRR= a+ {(b-a) x Benefits 0 319500 319500 319500 319500 319500 319500 319500 319500 319500 319500 Discount factor 250% 1 0.28571 0.0816 0.0233 0.0067 0.0019 0.0005 0.0002 0.0000 0.0000 0.0000 Discounted Costs 35000 75470.2965 20085.84 3760.62 1081.38 306.66 80.7 32.32 7.1104 0.17776 0.01616 135,825.12 Discounted benefits 0 91284.345 26071.2 7444.35 2140.65 607.05 159.75 63.9 14.058 0.35145 0.03195 127,785.69 Present value -35000 15814.0485 5985.36 3683.73 1059.27 300.39 79.05 31.58 6.9476 0.17369 0.01579 (8,039.43) [A / (A-B)]} a= rate giving a positive NPV= 24% b= rate giving a negative NPV= 250% A= Positive NPV=409,002.65 B= Negative NPV= (8,039.43) Therefore IRR= 24 + {(250-24)x[409,002.65/(409,002.65-(8,039.43))} = 245% The IRR for the project is 245% which is greater than the current rate of interest obtainable at SEDCO of 24% per annum. This means that even if a loan from SEDCO cannot be secured loans from other banks which have interest rates below 245% can be sought and the project will still be viable. This project will not be viable at rates greater than 245% per annum. 28
  • 29. Chapter 5 CONCLUSION 1 The project has the capacity to accommodate up to 9 batches of 10 000 chicken per annum. However for budgetary purposes 6 batches of 10 000 chickens be used so that the profitability of low capacity utilization is seen. 2 Since depreciation is charged on a straight line basis and no residual value is expected to on at the end of year 10, no cash flows are going to result from disposal of assets at the end of year 10 3. Discounted measures of project worth Benefit cost ratio The benefit cost ratio was found to be 1.53 which is greater than unitary; it is therefore which means that the project is worth undertaking Internal rate of return The IRR for the project is 245% which is greater than the current rate of interest obtainable at SEDCO of 24% per annum. This means that even if a loan from SEDCO cannot be secured loans from other banks which have interest rates below 245% can be sought and the project will still be viable. This project will not be viable at rates greater than 245% per annum. Net present value The net present value for the project at 24 % is positive which means that the project is viable. RECOMMENDATIONS The discounted measures of project worth show that the project is worth venturing into at a scale of 6 batches of 10 000 chickens It is therefore recommended that the project be implemented as the measures of project worth indicate that the project is viable. Even if the interest rates are to rise to 240% per annum the project will still yield a pro 29
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