GENERIC BUSINESS PLAN FOR PRODUCTION OF STRAW PELLETS

Transcription

1 STRAWPOWER Project Increased rural economic development in cross border region by empowering agriculture through using waste straw for energy production GENERIC BUSINESS PLAN FOR PRODUCTION OF STRAW PELLETS The project is financed by the European Union The project is implemented by Municipality of Mogila, Municipality of Halkidona, Greece and Macedonian Scientific Society Bitola

2 1. BUSINESS PLAN SUMMARY SCENARIO SCENARIO SCENARIO SCENARIO PROJECT DESCRIPTION PROJECT Concept, Goals and objectives Funding sources of Project. Investment pattern Network diagram of Project implementation and financing Parameters of business MARKET ANALYSIS Summary Introduction The biomass situation in Macedonia The forest land in Macedonia The agricultural residues biomass in Macedonia The agricultural residues biomass in Pelagonia Region The pellet market in Macedonia Republic of Macedonia - fact sheets Macedonian Economy Macedonian Energy Administration Macedonian Energy Policy Status and strategic commitments Conclusion ORGANIZATIONAL AND PRODUCTION PLAN Place of new Project implementation The manufacturing process and characterization of the Organizational management of plant for production of straw granules (pellets) Pellet Mill LM RS Range Shredders Automatic greasing unit Component Mixer Conveyor belt Page 2 of 74

3 Silo with automatic feeding auger Human Resources Policy of Project PROJECT FINANCIAL PLAN Prerequisites for calculations and their reasoning Sales forecast for Project Profit generation for Project Forecast of cash flow for Project Proceeds under project Payments under project Payments to the budget include: Financial costs Credit Structure Substantiation Breakeven point for Project Assessment of investment attractiveness for Project Calculation of discount rate Net Present Value (NPV) Internal rate of return (IRR) Discount payback period Profitability index Project development FORECAST RISK ANALYSIS ANALYSIS OF PROJECT VULNERABILITY Profit risks and consumer risks Transport risk Resource risk Legal risks Financial risks Risk reduction strategy SWOT analysis of Project CONCLUSIONS REGARDING THE EFECTIVENESS OF INVESTMENT SCENARIO SCENARIO SCENARIO SCENARIO Page 3 of 74

4 1. BUSINESS PLAN SUMMARY Having in mind this Business Plan objective, as well as the complexity of the investment and the production process itself, four implementation scenarios were developed. Each of these scenarios includes the investment and the production process itself on various parameters in terms of capacity of the production facility and the financial aspects, i.e. the available investment funds. SCENARIO 1 Production Capacity of 100 kg/h Investment Funds: 100% Bank loan SCENARIO 2 Production Capacity of 100 kg/h Investment Funds: 70% bank loan & 30% Investor s funds SCENARIO 3 Production Capacity of 250 kg/h Investment Funds: 100% bank loan SCENARIO 4 Production Capacity of 250 kg/h Investment Funds: 70% bank loan & 30% Investor s funds Page 4 of 74

5 1.1. SCENARIO 1 Project Concept SCENARIO 1 Location of Project PRODUCTION OF STRAW PELLETS FOR CAPACITY OF 100kg/h Macedonia, Pelagonia Region Project Implementation Schedule Rated project period Beginning of sales of straw pellets 6 years The 6 th month Project value Project Budget Own capital 0 Credit (investment) capital Autonomy rate 0% Credit amount Terms and Conditions of Credit Receipt Credit period, years 6 years Credit interest rate, % per annum 7.5% Interest paid Credit repayment Total revenue Project Profitability Capitalized net profit Aggregate cash flow Discount rate 6.8% Project Attractiveness for Investments Discounted payback period (DPP), years 5,31 Net present project value (NPV) Internal rate of return (IRR) 11,4% Investment profitability index (PI) 1,03 Page 5 of 74

6 1.2. SCENARIO 2 Project Concept SCENARIO 2 PRODUCTION OF STRAW PELLETS FOR CAPACITY OF 100kg/h Location of Project Project Implementation Schedule Macedonia, Municipality of Mogila Rated project period Beginning of sales of straw pellets 6 years The 6 th month Project value Project Budget Own capital Credit (investment) capital Autonomy rate 30% Terms and Conditions of Credit Receipt Credit amount Credit period, years 6 years Credit interest rate, % per annum 7.5% Interest paid Credit repayment Project Profitability Total revenue Capitalized net profit Aggregate cash flow Discount rate 7.7% Project Attractiveness for Investments Discounted payback period (DPP), years 5,48 Net present project value (NPV) Internal rate of return (IRR) 11,1% Investment profitability index (PI) 1,42 Page 6 of 74

7 1.3. SCENARIO 3 Project Concept SCENARIO 3 Location of Project PRODUCTION OF STRAW PELLETS FOR CAPACITY OF 250 kg/h Macedonia, Pelagonia Region Project Implementation Schedule Rated project period Beginning of sales of straw pellets 6 years The 6th month Project value Project Budget Own capital 0 Credit (investment) capital Autonomy rate 0% Credit amount Terms and Conditions of Credit Receipt Credit period, years 6 years Credit interest rate, % per annum 7.5% Interest paid Credit repayment Total revenue Project Profitability Capitalized net profit Aggregate cash flow Discount rate 6.8% Project Attractiveness for Investments Discounted payback period (DPP), years 2,45 Net present project value (NPV) Internal rate of return (IRR) 62,7% Investment profitability index (PI) 1,93 Page 7 of 74

8 1.4. SCENARIO 4 Project Concept SCENARIO 4 Location of Project PRODUCTION OF STRAW PELLETS FOR CAPACITY OF 250 kg/h Macedonia, Pelagonia Region Project Implementation Schedule Rated project period Beginning of sales of straw pellets 6 years The 6th month Project value Project Budget Own capital Credit (investment) capital Autonomy rate 30% Credit amount Terms and Conditions of Credit Receipt Credit period, years 6 years Credit interest rate, % per annum 7.5% Interest paid Credit repayment Total revenue Project Profitability Capitalized net profit Aggregate cash flow Discount rate 7.7% Project Attractiveness for Investments Discounted payback period (DPP), years 2,48 Net present project value (NPV) Internal rate of return (IRR) 62,4% Investment profitability index (PI) 1,87 Page 8 of 74

9 2. PROJECT DESCRIPTION 2.1. PROJECT CONCEPT, GOALS AND OBJECTIVES Each enterprise at the beginning of its activities should have the clear understanding of its needs in financial, material, labor and intellectual resources, the sources of their receipt, and the skills of precise calculation of efficiency of their use it process of its operation. Commercial enterprises may not be stable and successful in the market economy without clear and efficient planning of their activities, without permanent collection and accumulation of information about the status of target markets, positions of their competitors, and their own prospects and capacities. Despite the variety of business forms there are the key provisions applicable actually to all areas of commercial activity and to any companies. They are necessary in order to be prepared in advance and to avoid potential difficulties and threats, in order to mitigate in such a way the risks on the way to achieve the fixed objectives. That s why development of strategy and tactics of operation of the enterprise is an important task for the enterprises. The objective of development of the present business plan is to plan economic activities of the enterprise for the immediate and long-term periods according to the market demand and possibility to get the required resources. This business plan includes substantiation of efficiency of investment in establishment of modern straw pellets production plant with following parameters: Capacity of 100 kg/h Investment Funds: 100% bank loan The choice to present this scenario was made in order the most unfavorable option to start the investment - production of straw pellets to be presented. Strategic objective of implementation of this Project is to organize operation of the enterprise basing on production, promoting and selling biomass fuels - pellets from straw. The Initiating Company is agricultural company that intends to use the raw material - its own biomass, available from its own agriculture production. The company cultivates 100 ha: 34.46% wheat, 29.90% barley, % maize and 10.31% sunflower. The production facility will be installed on total surface of 1 ha land, owned by the Initiating company. Page 9 of 74

10 Main Project Tasks are as follows: Selection of competitive and marketing-promising location of the future enterprise. Creation of competitive enterprise with powerful production basis. Development of interconnected areas of activity of the company. Production of high-quality products with use of the advanced technologies. Involvement of high-skilled professionals in this area. Achievement of good financial results. Ensuring systemic quality control of manufactured products. Increase of company s value. There are the following main tasks in implementation of project of examined enterprise: Development of business plan of investment project as a tool for attraction of financing. Attraction, within 1-3 months upon completion of business plan, of investment capital in amount of for implementation of investment project. Within 5 months after attraction of financing - construction and putting in operation of production of straw pellets with capacity of 100 kg per hour. Repayment of financial resources attracted for implementation of investment project in time due and in full amount. Increase of efficiency of business of the enterprise and its market value. Implementation of project will allow: To sale straw pellets to consumer: population, enterprises, organization in Macedonia; To come into market and win positions on Macedonia market on the basis of straw pellets; To make profit from activity of established enterprise; To meet consumer demand in assortment of offered products; To increase market value of enterprise in mid-term. The following terms and conditions of credit (investment) receipt are preferable: Credit line of total amount of Credit interest rate 7.5% per annum. Period of credit line use 72 months. Grace period - 12 months. Pledge for the loan real estate, pledge of equipment. Page 10 of 74

11 Credit line Bank (the investor) Credit body Agricultural company, project initiating company Interest for use of credit resources Figure 2.1-1: Project Financing Scheme Total expected amount of revenue from sales of products will be sufficient to perform in full scope credit obligations taken by the company initiating this investment offer. Initiating company Production complex Bank (investor) Payment for the products Consumer Figure 2.1-2: Project Implementation Scheme Basic parameters adopted for calculations under the project: Rated project period 6 years (72 months). Planned pellets processing capacity 100kg per hour, 16 working hour per day, 25 working days per month. Page 11 of 74

12 The currency of Project parameters calculation EURO. Credit required for project implementation is Credit resources under the project are necessary in order to ensure: Creation of all facilities for construction of straw pellets processing plant; Preparation of project documentation; Construction and installation works; Purchase of technological equipment for plant; Purchase of loading and transport vehicles, office equipment, other tools and equipment; Formation of raw material stock for processing FUNDING SOURCES OF PROJECT. INVESTMENT PATTERN Investment costs of the company (investments) for purchase of tangible and intangible assets are shown in the Investment section of business plan. Total project costs amount to Project will be financed by credit (investment) capital in full amount. Areas of investment according to the Project directions are shown in the following table. Table Investment expenditures of project Items of expenditure Own funds Investment money Total Production facility Obtaining Building permits & communal tax Development of environmental study Construction works Re-construction works Electricity installation & tax Water supply installation Rental cost (5 month) Production line Pellet mill LM Automatic greasing unit Red component mixer RS Page 12 of 74

13 3m3 Silo with one auger Conveyor Belt Installation Transport to the destination (7%) VAT Purchase of raw material Packing equipment (with transport and VAT) Packing materials Industrial wooden pallets Bags (2 month reserve) Forklift Transport vehicle Other operating and overhead expenses PROJECT VALUE Percentage ratio 0% 100% Structure of investment expenditures of project is as follows: Forklift 4.4% Transport vehicle 5.0% Other operating and overhead expenses 3.0% Packing materials 3.1% Production facility 16.8% Packing equipment 11.9% Production line 47.1% Purchase of raw material 8.6% Figure 2.2-1: Investment pattern Page 13 of 74

14 The biggest share in structure of investment expenditures is taken by Production line: 47.1% from whole amount of investment expenditures. Production facility amounts to 16, 8% from all investment expenditures of project. Purchase of Packing equipment will take 11, 9% from all investment expenditures of project. Detailed information on sources of project financing and usage of monetary means is stated in AnnexNo NETWORK DIAGRAM OF PROJECT IMPLEMENTATION AND FINANCING Implementation of project is designated for 6 years. Outlay of all investment expenditures and conduction of all necessary works for implementation of project will take approximately 5 months. Table 2.3-1: Network diagram of project financing and implementation # Items and expenditures 1 month 2 month 3 month 4 month 5 month Total 1 Production facility Rental cost (5 month) Production line Purchase of raw material Packing equipment (VAT &transport included) Packing materials Page 14 of 74

15 7 Forklift Transport vehicle Other operating and overhead expenses Total investment ,000 20,000 18,752 18,685 20,780 15,000 10,000 11,622 9,850 5, month 2 month 3 month 4 month 5 month Figure 2.3-1: Diagram of project financing More detailed information on terms of investment and project implementation is stated in Annex No PARAMETERS OF BUSINESS In order to make calculations on project, the following parameters of business were accepted, mentioned parameters can be divided into following groups: General parameters; Working conditions of agricultural company; Page 15 of 74

16 Working conditions of plant for production of pellets; Other Expenditures of the Project; Parameters of taxation. General parameters are used for description of main conditions in the process of calculations, which have influence on financial part of project. Table 2.4-1: General parameters of project No. Parameters Conditions 1. General parameters 1.1 Estimated project period, years 6 years 1.2 Interest settlement rate on credit, % per annum 7,5% 1.3 Interest settlement rate on deposit, % per annum 10% 1.4 Discounting rate, % per annum 7% 1.5 Percentage ratio, % Own funds 0% Investment money 100% Working conditions of company include main exponents of their work, which have influence on financial part of project. Table 2.3-2: Working conditions of company No. Parameters Conditions 2. Working conditions of agricultural company Volume of biomass from its own agricultural activities, tons per year Working conditions of plant for production of pellets Sale price of straw pellets, EUR 146 Processing volume (straw pellets), tons/hour 0,10 hours per day 16 operational working days per year 300 operational working days per month 25 Processing volume (straw pellets), tons/month 40 Processing volume (straw pellets), tons/year 480 Consumption of biomass per tons of pellets, tons 1,2 Page 16 of 74

17 No. Parameters Conditions Biomass volume per month, tons 48 Biomass volume per year, tons 576 Remaining needed quantity of biomass, tons/year 276 Price of biomass, EUR/ton 18,03 Transport costs from biomass suppliers to the production facility, EUR/ton 6,84 4. Other Expenditures of the Project Communications: Internet & phone bills, EUR per month 50 Bookkeeping services, EUR per month 50 Big bag 15 kg, EUR/pcs. 0,08 Packing volume per month, pcs Big bag 1000 kg, EUR/pcs. 7,4 Packing volume per month, pcs. 20 Transport charges, % from sales volume 3,00% General administrative expenses, % from sales volume 2,50% Marketing expenses, % from sales volume 2,50% Electricity price, EUR/kW 0,17 Consumption of Electricity, kw/hour 12,7 Building and equipment repair and maintenance, %/year from the initial cost 1% Parameters of taxation are adopted with regard to project in accordance with taxation system in Macedonia. Table 2.4-3: Taxation on project 5. Taxation Income tax 10,00% VAT 18,00% Source: Public Revenue Office of Republic of Macedonia ( Page 17 of 74

18 3. MARKET ANALYSIS 3.1. SUMMARY General pellet industry in Macedonia is in its initial stage of development, growing continuously, but still very slowly. There are some wood industries that have already started wood pellet production, mostly using their own wood by-products. Until now, there is no production of straw pellets in the country. It is noted that some companies are starting their involvement in the market by installing pellet producing equipment produced by Turkey, China and Serbia. Mostly they are importing and sale of pellets stoves and boilers for wood pellets. The import and consumption of straw pellets is still insignificant compared to the use of wood pellets. However, general pellet consumption in Macedonia, especially in households, shows continuously and rapid growing as a result of the costs, operational characteristics and environmental issues as well. The consumption of pellets in households and in some industry sectors (mostly hotels, restaurants, offices, small scale production plants) is increasing in parallel with the increase of electricity and fossil fuels prices. A large number of consumers did not answer back or move on firewood but were required fuel to the price, comfort and efficiency could ever expect to replace existing energy sources. As a result of low public awareness on opportunities and advantages of pellet production and/or consumption over the past years, the lacking domestic pellet demand resulted with low pellets production compared to the imported quantities mostly from West Balkans countries: Serbia, Bosnia and Herzegovina, Montenegro, Albania and Bulgaria. When it comes to biomass the resources for pellet production, the situation is satisfactory. Macedonia, as part of Balkan region, unlike other regions in the world, has a high potential for exploitation of energy from biomass. Macedonian forest resources (wood pellets) and cultivated lands (straw pellets) have high potential but are still much underutilized. Market potential for pellet consumption is much higher than the actual consumption today, and indicates great possibilities for domestic production and sale of pellets. Quality standards are not applied in the Macedonian production industry, but the production plants follow a certain production procedure provided by pelletizing equipment manufacturers. However, they are not certified officially. In addition, none of the companies assure the quality of their logistics and products. State policies in general do not provide supportive frameworks for bioenergy development. General conclusion is that the Government needs to undertake big steps to support this industry in order this fuel to be used in the energy sector. Page 18 of 74

19 3.2. INTRODUCTION General pellet industry in Macedonia is in its initial stage of development, growing continuously, but still very slowly. As for pellet production, the country has not noted yet production of straw pellets. The only pellet production is the one from wood, produced in low amounts, much lower than current domestic consumption. Pellets are used in households and some industrial applications. Most of consumed quantities of pellets are imported from Serbia, Bosnia and Herzegovina, Montenegro, Albania and Bulgaria. Nowadays, the major raw material for pellet production is wood residues from wood industries (furniture producers, building materials, etc.). At the moment, large quantities of biomass are unused. Following the growing demand of pellets, these raw materials will be considered as potential raw material for wooden and straw pellet production. In Macedonia, wood residues are used unprocessed, as they leave the industrial operation. These materials are often used in boilers directly by the producing company or by companies near the production site. Nowadays, with the development of wood pellet production, these residues become more important, which means that the economic profit of the company would be higher if residues were sold as raw material for pellet production. 50% 45% 47% 40% 35% 30% 32% 25% 20% 15% 10% 5% 10% 8% 4% 0% Solid fuels Oil derivates Renewable energy Electricity Natural gas Source: State Statistical Office Republic of Macedonia ( Figure 3.2-1: Total energy consumption presented by types of energy, 2012 Page 19 of 74

20 The situation in Macedonia regarding the use of agricultural biomass (straw and other agricultural residues) is still in its initial phase. There are some initiatives for use of these resources, but still most of the quantities are left unused. Being at the beginning of its development, Macedonian pellet market still features considerable growth potentials. There is no legislative framework for pellet production and consumption in Macedonia. In general, the Macedonian energy policy is based on solid fuels and oil derivates (approx. 79%). Macedonian public is not well informed on Renewable Energy technologies and their advantages and there is not enough environmental consciousness. People are still skeptical within undertaking any innovation and/or new technologies. The best way to overcome this situation is the implementation of pilot/demonstration pellet production facility that will demonstrate the processes as well as its risks and benefits, before they are applied broadly THE BIOMASS SITUATION IN MACEDONIA The types and regional distribution of the sources of biomass in Macedonia depend on the features of each individual region. Biomass is mostly available is the agricultural and forest regions of the country. Out of the total biomass used for energy purposes, wood and wood coal account for 80%. The Republic of Macedonia also makes use of the grape vine branches, rice shells and fruit tree branches for energy purposes The forest land in Macedonia The forest land in the Republic of Macedonia accounts km2 (1.16 million ha) of which the total surface area under forests is 960,000 ha. The total wooden mass is about 74 million m 3, and the total annual growth is 1.85 million m 3 with an average annual growth per hectare of 2.02 m 3. The state owned forests account for % of the total surface, while their total share of wood reserves is 92.2 %. Private forests account for 9.86 % (104 thousand ha) of the total afforested surface area and they participate with 7.8 % in the total wood reserves. Private forests have relatively small surface area, smaller than 1 ha, and they are fragmented in individual or grouped plots which represent enclaves in the state owned forests. Out of the total surface area under forests and forest land, about 8% is unregulated (without commercial bases). Forestry in the Republic of Macedonia is a commercial branch which participated with 0.3% 0.5% in the gross national product. However this contribution is significantly bigger, if the general benefits to society are taken into account. Forestry participates in Page 20 of 74

21 the national economy mainly through the work of the Public Enterprise MakedonskiShumi, which was established by a governmental decision in year The core function of this enterprise is to manage the state owned forests, including usage, cultivation and protection of the forest. After 2001, this enterprise supplies the market with 600 thousand m thousand m 3 used for fire and technical wood per year, and the private forests supply an additional 120 thousand m thousand m 3. About 90% of that is deciduous, and the remainder is evergreen trees. Table : Total volume of cut wood in Macedonia In thousand m 3 Year Slate forests Private forests Technical wood Firewood Residuals Total wood mass Source: Ministry of Economy of Republic of Macedonia ( The agricultural residues biomass in Macedonia Macedonian Agriculture is accounted for 13-15% of the GDP (production sector) Annual trade exchange of agricultural products amounts 500 mil.us$ Irrigated Land is hectares ( ha eff.) Arable land: ha (80% private property, 20% former public enterprises) Table : Agricultural area In Macedonia by category of use ( ), (In thousand hectares) Total Cultivated land Arable Page 21 of 74

22 land and gardens Orchards Vineyards Meadows Pastures Ponds, reed beds and Table : Straw production in Macedonia, (avg ) wheat rye barley oats maize sunflower tobacco total straw production (t) lower heating value of straw (GJ/t) energy potential of straw (GJ) energy potential of straw (MWh) Equivalent to light oil EL-1 (t) Straw production in Republic of Macedonia amounts t, majority from: wheat 48,47% barley 23,81% Page 22 of 74

23 maize 22,13% Straw use in Macedonia Straw is most common bedding material for cattle production in the country; Number of cattle is (avg ); Average use of straw for bedding is 1-2 t/head; Average straw used for bedding (1,5 t/head) is surplus of straw is t; Conclusion: Straw can be valuable energy source in the country. Use of Crop Residues in Macedonia Crop residues in Republic of Macedonia are underutilized; Cereal straw is used as litter and fodder, and corn stubbles are used mainly as fodder; There are certain surpluses of cereal straw that can be used as energy source ( t) Grape pruning residues recently are used as mulching material that has highly positive effect on soils and yield. This is new movement and still big portion is underutilized and burned in open fires; Orchards pruning residues are relatively smaller but highly concentrated in several regions, so use as energy source can be of interest; The easiest way of utilization is in heat production (direct combusting). Heath from crop residues can be directly used on the farm for: Decreasing cost of energy use in rural household (cooking, heating of the house, hot water production); Improvement of agricultural activities (heating of protected areas for vegetable growing, heating of animal farms) that will increase productivity and/or increase value of the products from the farm; Development of processing capacities that need heat energy in the process (heat for sterilization, pasteurization, etc.). The biggest problem of crop residues is low bulk density and it is very costly to transport them, so they should be used as local energy for local development, especially for: Producing of briquettes/pellets from crop residues; Use of heat energy for processing/industry development (local development) The agricultural residues biomass in Pelagonia Region As the investment the facility for production of straw pellets will be located in Pelagonia Region and the production will use biomass that originates from this region, we enclose some data that refers to this region. Page 23 of 74

24 Average number of livestock is (average ) Average use of straw for bedding is 1-2 t/head Average straw used for bedding (1, 5 t/head) is t Average straw production t (average ) Surplus of straw is t Equivalent to light oil EL-1 (Makpetrol RM) t Straw can be valuable energy source in this region Straw production in Pelagonia Region is t, (avg ) majority from: wheat (61,74%), barley (21,26%), maize (8,66%), sunflower (5,31%), tobacco (2,85%), rye (0.18%), and oats(0.01%) THE PELLET MARKET IN MACEDONIA As we have previously noted, the pellet market in Macedonia is consisted of mostly imported quantities of pellets. The import of pellets is made from the producers from Serbia, Albania, Montenegro, Bulgaria, Bosnia and Herzegovina and insignificantly quantities from Romania. Most of imported pellets (97%) have quality certificate mark A2 and the rest (3%) have quality certificate mark A1. The import from Albania, Montenegro and Bosnia and Herzegovina is covering pellet market demands of the Northern and Western regions of Macedonia, and the import from Bulgaria is covering the needs of the Eastern Region of Macedonia. Small part of imported quantities is being re-exported to Greece. Macedonia has not registered any significant producer of pellets (wood pellets). There have been several attempts for production of pellets in few municipalities throughout the country by installation of mini production plants, mostly using equipment from China and Serbia and they are reduced for some domestic volumes or quantities that cover the heating needs of 3 or 4 households. So far, Macedonia does not record any information about manufacturer of pellets from biomass or more specifically from straw. The market has seen several companies dealing with trade of pellets from straw that have been imported from Serbia, but the quantities are insignificant. There is currently no known commercial presentations and examples of installed boilers that run on straw or straw pellets. The market price of wood pellets range from 175 MKD (2, 85 EUR) up to 220 MKD (3, 58 EUR) per bag with total weight of 15 kg, or 190 EUR/t up to 238 EUR/t. The price in the last 6 years declined by 13% (in 2010 regular price was 220 MKD/bag, and today amounts 185 MKD/bag) The market price of straw pellets ranged from 210 MKD (3, 41 EUR) to 225 MKD (3, 66 EUR) per bag with total weight of 25 kg, or 136 EUR/t up to 146 EUR/t. The winter season 2015/2016, period of consumption of pellets, notes that although the region had mild and relatively warm winter with mild temperatures, consumed quantities of pellets are higher than last year due to the increased number of consumers. Page 24 of 74

25 Republic of Macedonia - fact sheets Macedonia gained its independence peacefully from Yugoslavia in Greek objection to Macedonia s name, insisting it implies territorial pretensions to the northern Greek province of the same name, have stalled the country s movement toward Euro-Atlantic integration. Immediately after Macedonia declared independence, Greece sought to block Macedonian efforts to gain UN membership if the name Macedonia was used. Macedonia was eventually admitted to the UN in 1993 as The Former Yugoslav Republic of Macedonia, and at the same time it agreed to UN-sponsored negotiations on the name dispute. In 1995, Greece lifted a 20-month trade embargo and the two countries agreed to normalize relations, but the issue of the name remained unresolved and negotiations for a solution are ongoing. Since 2004, the US and over 130 other nations have recognized Macedonia by its constitutional name, Republic of Macedonia. Although Macedonia became an EU candidate in 2005, the country still faces challenges, including fully implementing the Framework Agreement, resolving the outstanding name dispute with Greece, improving relations with Bulgaria, halting democratic backsliding, and stimulating economic growth and development. Macedonia's membership in NATO was blocked by Greece at the Alliance's Summit of Bucharest in Location: Southeastern Europe, north of Greece Geographic coordinates: N, E Map references: Europe Area: total: 25,713 sq km, land: 25,433 sq km, water: 280 sq km Land boundaries: Total: 838 km. Border countries (5): Albania 181 km, Bulgaria 162 km, Greece 234 km, Kosovo 160 km, Serbia 101 km Page 25 of 74

26 Climate: warm, dry summers and autumns; relatively cold winters with heavy snowfall Terrain: mountainous with deep basins and valleys; three large lakes, each divided by a frontier line; country bisected by the Vardar River Natural resources: low-grade iron ore, copper, lead, zinc, chromite, manganese, nickel, tungsten, gold, silver, asbestos, gypsum, timber, arable land Land use: agricultural land: 44.3%, arable land 16.4%; permanent crops 1.4%; permanent pasture 26.5%, forest: 39.8%, other: 15.9% (2011 est.), Irrigated land: 1,280 sq km (2012) Total renewable water resources: 6.4 cu km (2011) Freshwater withdrawal (domestic/industrial/agricultural): total: 1.03 cu km/yr (21%/67%/12%), per capita: 502 cu m/yr (2007) Natural hazards: high seismic risks Environment - current issues: air pollution from metallurgical plants Environment - international agreements: party to: Air Pollution, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Wetlands Government type: parliamentary democracy Capital: Skopje, geographic coordinates: N, E Time difference: UTC+1 (6 hours ahead of Washington, DC, during Standard Time) Daylight saving time: +1hr, begins last Sunday in March; ends last Sunday in October Legal system: civil law system; judicial review of legislative acts Legislative branch: description: unicameral Assembly (123 seats; 120 members directly elected in multi-seat constituencies by proportional representation vote and 3 directly elected in diasporas constituencies worldwide by simple majority vote; members serve 4-year terms) Judicial branch: highest court(s): Supreme Court (consist of NA judges); Constitutional Court (consists of 9 judges) Macedonian Economy Since its independence in 1991, Macedonia has made progress in liberalizing its economy and improving its business environment, but has lagged the Balkan region in attracting foreign investment. Corruption and weak rule of law remain significant problems. Some businesses complain of opaque regulations and unequal enforcement of the law. Macedonia s economy is closely linked to Europe as a customer for exports and source of investment, and has suffered as a result of prolonged weakness in the euro zone. Unemployment has remained consistently high at more than 30% since 2008, but may be overstated based on the existence of an extensive gray market, estimated to be between 20% and 45% of GDP, which is not captured by official statistics. Macedonia maintained macroeconomic stability through the global financial crisis by conducting prudent monetary policy, which keeps the domestic currency pegged against Page 26 of 74

27 the euro, and by limiting fiscal deficits. The government has been loosening fiscal policy, however, and the budget deficit was 4.2% of GDP in both 2013 and 2014, gradually falling to 3.7% in Public debt at the end of 2015 was 40.3%, which although low by regional comparison, is significant for a small economy. GDP: $28.89 billion (2015 est.) $27.99 billion (2014 est.) $26.98 billion (2013 est.) Note: data are in 2015 US dollars; Macedonia has a large informal sector that may not be reflected in these data GDP - real growth rate: 3.2% (2015 est.) 3.8% (2014 est.) 2.7% (2013 est.) GDP - per capita (PPP): $14,000 (2015 est.) $13,500 (2014 est.) $13,000 (2013 est.) Note: data are in 2015 US dollars Gross national saving: 30.2% of GDP (2015 est.) 29.2% of GDP (2014 est.) 26.7% of GDP (2013 est.) GDP - composition, by end use: Household consumption: 69.1% Government consumption: 16.6% Investment in fixed capital: 24% Investment in inventories: 6.8% Exports of goods and services: 52% Imports of goods and services: -68.5% (2015 est.) GDP - composition, by sector of origin: Agriculture: 10.2% Industry: 24.9% Services: 64.9% (2015 est.) Agriculture - products: Grapes, tobacco, vegetables, fruits; milk, eggs Industries: Food processing, beverages, textiles, chemicals, iron, steel, cement, energy, pharmaceuticals, automotive parts Industrial production growth rate: 3% (2015 est.) Page 27 of 74

28 Labor force: 961,900 (2015 est.) Labor force - by occupation: Agriculture: 18.3% Industry: 29.1% Services: 52.6% (2014 est.) Unemployment rate: 26.9% (2015 est.) 28% (2014 est.) Macedonian Energy Administration Ministry of Economy ( - Energy Department, in charge of country's energy policy. Energy Regulatory Commission (ERC) ( created in 2002 regulates the energy sector. It is in charge of tariff system and prices, authorization procedures, development of market codes and customer protection as well. It is made up of 4 departments and financed by a tax on the total revenue of energy companies. Directorate of the Compulsory Oil Reserves ( in charge for urgent supply of oil and oil products to the market in case of disturbance of the energy reliability of the country caused by large-scale disturbances in supply. Energy Agency of the Republic of Macedonia ( established in 2006 by the Ministry of Economy to promote and coordinate the energy policies, and to develop Macedonia's energy sector. It operates since September Macedonian Centre for Energy Efficiency (MACEF) ( is the agency in charge of promoting energy efficiency. MACEFs mission is to increase the Energy Efficiency (EE) and Environmental Protection at national level by capacity building, identifying and implementing EE measures in the cooperation with governmental institutions, local self-government units, engineers, donor organization and ecologists Macedonian Energy Policy October 2005: Macedonian Parliament signed the Energy Community Treaty in Athens, bringing together 8 South-Eastern European states (Albania, Bosnia Herzegovina, Bulgaria, Croatia, Romania, Serbia Montenegro and the United Nations Mission in Kosovo, UNMIK) and the European Union for the creation of an integrated energy market. This treaty also reinforced the legal bases for the creation of an independent energy market regulator. 2010: Macedonia adopted a Strategy for Energy Development 2030 as a result of country's heavy dependence on imported energy, the bad conditions of the energy production system and the inefficiency of energy production and use. The Page 28 of 74

29 program goals are to modernize existing infrastructures and build new facilities, using renewable and natural gas and favoring domestic resources for electricity production. It also aims to improve energy efficiency, introduce economic energy prices and integrate the energy sector in the regional and European markets. February 2011: Macedonia adopted new Energy Law to transpose EU legislation into national law. The law includes a new model for electricity and gas markets. It aims to introduce new forms of energy trading, promote real competition in the electricity market, and increase transparency. The powers of the ERC have also been reinforced, thereby creating the necessary conditions for the full opening of the electricity and natural gas markets. During the years few amendments on this law have been adopted Status and strategic commitments Macedonia is strongly dependent on energy imports. It does not have any sources of crude oil or of natural gas, and in recent years it faces an ever increasing electricity imports. The increase of fuel imports and the increase of fuel prices on the global market greatly contribute to the growth of the trade deficit of the Republic of Macedonia. In the long run, unless the situation improves, energy fuel imports can also have adverse impacts on the inflation, foreign currency reserves and the macroeconomic stability of the country in general. Since Macedonia became independent, particularly in the period from 1991 to 2008, several energy strategies have been prepared, using foreign financial sources. However, these strategies have not been adopted nor realized by the Government of the Republic of Macedonia. The absence of vision and the lack of a long term strategy for the development and operation of the energy sector have led to a strong stagnation in its development and promotion. All of the above reasons have led to the need to enact an energy development strategy of the Republic of Macedonia. The energy development strategy in the Republic of Macedonia for the period with a vision to 2030 has been prepared upon request of the Ministry of Economy of the Republic of Macedonia. The strategy is to be used as a basis for preparation of action plans. Overall, the strategy provides detailed diagnostics of key problems burdening the energy sector in the Republic of Macedonia: - highlighted energy deficiency; - long term depressed energy prices, lack of stimuli to save; obsolete technologies and lack of investments for maintenance, modernization and expansion of the existing capacities, as well as construction of new capacities; low energy efficiency; - lack of complex programs for saving of energy, especially in the household sector, but also in the other sectors comprising significant consumers; unfavorable structure of the energy types (production, import and consumption) from an environmental and economic aspect; incomplete harmonization of the legislation with the European standards with respect to price policies, environment etc. Page 29 of 74

30 These conditions in the area of the energy sector in the country already deliver major negative economic implications, and in the long run they could be transformed in a serious limiting factor of the economic development. Alternative approaches have been proposed to overcome all of the previously mentioned problems by focusing of their strengths and weaknesses. This will provide the Government with an opportunity to make smart choices and take informed decisions based on scientific and competent analyses. The Energy Strategy has been conceptualized as a national strategy that takes into account the interests of the Republic of Macedonia and its citizens. Partial, short term and private interests have been incorporated to an extent that does not disrupt the long term national interests. The development of the energy sector represents one of the pillars of a sustainable, economic, technological, environmental and overall societal development of the country, which, together with the increase of the standard of living and, in that context, the emphasized concern for the standard of future generations, will enable the Republic of Macedonia easier and more efficient accession in the European Union. The Strategy is in accordance with the practices and regulations of the EU and complies with all obligations undertaken in the regional and international energy area. The Strategy envisages demonopolization of the utilization of the energy infrastructure to the largest possible extent, and thus, greater liberalization and competition on the energy market. For the purposes of providing good quality, stable and economically acceptable supply of energy of any king, and especially electricity, when analyzing the possible scenarios for the Study, attention has been devoted to the Republic of Macedonia s full compliance to the principles of the Agreement for the Energy Community as well as the directives of the EU. In addition, special attention should be devoted towards full transparency, competitiveness and non-discrimination in the energy sector, having in mind the liberalization of the sector both in the field of production, as well as in the field of supplying energy fuels, especially electricity CONCLUSION The pellet market in Macedonia is not well developed, but it has its potential. However, if the proper actions are taken, the expansion of the market is sure. An important economical aspect that may influence market development is the continuously increasing diesel and electricity price. This motivates investors to get involved with other kinds of fuels, with a major focus on renewable fuels. Thus, mixed biomass pellets are also going to evolve. Another financial aspect that can influence this sector could be the reduction of energy imports, in terms of oil and electricity imports. There is a significant demand for pellet standardization in order to improve its position in the global market in terms of quality. The biomass availability is important, but a big percentage is not being used for energy purposes and remains unused. Page 30 of 74

31 Main obstacle for further market development is the lack of governmental instruments that could support new business initiatives and implementation of innovative technologies regarding the use of biomass and production/consumption of straw pellets. Another factor that hampers pellet market development is current low public environmental awareness. Even that the Macedonian public, as well as the business sector, is showing positive attitude towards pellet consumption, there is still much to do in order to ensure adequate flow of information, raise awareness on the opportunities and advantages of pellet production/consumption. Page 31 of 74

32 4. ORGANIZATIONAL AND PRODUCTION PLAN 4.1. PLACE OF NEW PROJECT IMPLEMENTATION Place of project implementation: Macedonia, Municipality of Mogila: Geographical location: Mogila, Bitola, Macedonia, Europe. Geographical coordinates: 41 6' 30" North, 21 22' 43" East. Figure 4.1-1: Place of project implementation The investor is agricultural company that intends to use the raw material - its own biomass, available from its own agriculture production. The company cultivates 100 ha: 34.46% wheat, 29.90% barley, % maize and 10.31% sunflower. The production facility will be installed on total surface of 1 ha land, owned by the Investor. The company can calculate 300t biomass from its own agricultural activities; the remaining needed quantity (this quantity depends from the chosen capacity scenario) will be bought from the near agricultural companies in order full operational capacity of the production plant to be achieved. Loading and unloading services will be provided by Investors staff. The assets list Investors (own assets): 1) Land with a total surface of 1 ha; 2) Agricultural equipment/machines: tractor & trailer, combine THE MANUFACTURING PROCESS AND CHARACTERIZATION OF THE. The Project foresees establishment of complex consisting of plant for production of straw pellets. The product: pellets from straw according to the national or international standard of quality. Page 32 of 74

33 The raw material used within production is local straw from: wheat, oats, rye, barley, sunflower, tobacco and maize. Renewable energy resources gradually attract more attention in the world. There are two reasons for this. The first the world's fossil fuel resources are unevenly distributed, and most economies are highly dependent on imports of energy resources. The second - pessimistic forecasts concerning global warming encourage the reduction of greenhouse gas emissions into the atmosphere, by searching for alternatives to fossil fuel combustion. Such alternatives are renewable energy sources, combustion of which reduces dependence on fuel imports. Biofuels are the most commonly used energy sources Biofuels are the dominant fuels in some developing countries. Unused agricultural byproducts could be successfully utilized in fuel production, by processing raw material into briquettes or pellets. Biofuel can be in a solid, liquid or gas state. In the first case, minimal mechanical processing as chopping of biomass is sufficient; thermal, chemical, biochemical and microbiological processes can be avoided in this case. It is considered that utilization of biomass for energy purposes does not increase carbon dioxide emissions to the atmosphere, because growing plants remove carbon dioxide from the atmosphere through photosynthesis [XXX]. Water content is one of the most important indicators of the straw quality. The optimal moisture content of straw for pellet production should not exceed 12 percent [YYY]. Moisture content of straw as of raw material depends on the ambient weather conditions during harvesting, handling techniques and on storage conditions. The right moisture content will produce the best quality pellets, reduce energy consumption and reduce pellet mill downtime [PelHeat.com]. Excess moisture promotes biodegradation of straw, storage losses and results in reduced calorific value of a product. Reduced moisture content in fuel could be achieved by means of timely straw harvesting, proper storage and additional drying [YY,ZZ] There is a lot more to making pellets than simply dropping material into a pellet mill. These steps to produce quality pellets from a range of biomass materials a given below: Size Reduction: Chippers/Shredders, Hammer Mills Material Transportation: Fans, Cyclone Separators and Screw Augers Drying Solutions: Rotary/Drum Dryers, Pipe Dryers Mixing Solutions: Batch Mixers Conditioning: Water and Steam Addition, Binders Pellet Production: Round and Flat Die Pellet Mills Sieving: Removing Fines Cooling: Counter Flow Coolers Pellet Transportation: Bucket Elevators Bagging and Storage: Bags, Sacks and Silos Page 33 of 74

34 Organizational management of plant for production of straw granules (pellets) In accordance with concept of this project, in order to start production of straw granules (pellets), it is necessary to construct new plant. The project provides for purchase and installation of complex plant for production of straw granules (pellets). As a result of exploring the Europe market of producers for projected capacity (100 kg/h) ELF Systems s.r.o can be potential supplier of equipment for solvent straw pellets plant. The line consists of the following: Pellet mill LM 72; Automatic greasing unit; Red component mixer; RS 750; 3m3 Silo with one auger; Conveyor Belt; Installation Pellet Mill LM 72 Granulation unit effectively granulate all kinds of biomaterials instead of waste for more cost raw materials. Granular biomaterials can be used as material for heating, such as animal feed pellets, and can even serve as an effective form of storage of biomass. Can granulated straw, algae, miscanthus, hops, waste paper and various types of biomass. The first phase is crushing biomaterial, and then follows the production of pellets in pelletizing production line. Pellet machine has a very unique design. Its size and features are unparalleled in the market place today. Pellet mill is an industrial quality machine which produces up to 150 kg of pellets per hour and is designed to run 24/7 if required. Two pellet mills can be easily operated concurrently by one person. The granulation unit consists of a dosage worm/auger with a closed feeding hopper. Material for granulation is placed into the feeding hopper. The auger brings the material to the feed arm, where the exactly defined amount of material falls down to the mixing chamber. Non standard granules and dust are returned by a spiral auger to the feeding hopper and are put through the pelletizing process again. Finished granules fall down from the sorting apparatus to a prepared container. Page 34 of 74

35 Technical features Pellet mill LM 72: Production rates per hr Complete unit weight Approximate space required Height of unit Power for full unit Safety certificates Standard working environment Pellet size Requirements for the feed particle size Requirements for the feed moisture level Types of biomass Typical biomass Types of specialist dies from kg/hr (depends on the material) 310 Kg 4 Square Meters 2.2 Meters 8,85 kw 400V / 25A a 230V / 16A CE between +5 and +35 Celsius 3.5mm, 6mm or 8mm 3-3,5mm up to 12% 80 different kinds at present sawdust, straw, grass, paper 4 for each diameter Page 35 of 74

36 Figure 4.1-1: Pellets production Page 36 of 74

37 RS Range Shredders The Cutting grinder pellet mill is designed for cutting and grinding straw, wood shavings and coarser sawdust for pellet production. It is also suitable for cutting and grinding straw for briquette production. The Grinders screen, cutting knives and special hammers are easily replaceable. The rotor on the grinder can be easily cleaned by lifting off the whole feeding hopper including its front cover. An operator can monitor the grinder load by means of an amp-meter. Straw is put into the grinding chamber manually with a fork. The bales have to be broken up beforehand, and placed next to the machine. The ropes should also be removed, (as they could wind around the rotor and the friction could cause fire.) The straw should be shaken with the fork to remove stones that could otherwise get into the rotor and cause damage or sparks and could start a fire. Page 37 of 74

38 Automatic greasing unit This greasing unit lubricates the most stressed bearings on the pellet press shaft and pressing wheels. This is done every hour automatically and prolongs the usage life span of the bearings enormously. The grease container on the Unit is transparent so you can easily maintain the correct grease level Component Mixer Many pellet makers have realized that a single ideal biomass does not exist. This is why additional components are widely used by large pellet production companies. Even a small amount of a component, for instance 1-5%, can make a big difference in either the look or quality of the pellet. It has got also very positive influence on the mill output Conveyor belt Conveyor belt has been designed for filling Big Bags of any size usually found on the market today. It is hard to imagine that the production capacity amounts 200kg or more pellets per hour and has no way of transferring them from the pellet mill to a storage place. It can be done by hand but it can spend the working hours in a bit more productive way. The pellets continue cooling in the big bag and are ready for packaging in 24 hours time Silo with automatic feeding auger Page 38 of 74

39 Silo with automatic feeding auger The silo is build from plywood attached to a metal frame. It can accommodate 3m3 of biomass. It is equipped with an anti-bridging device and can feed the biomass to two of our pellet mills simultaneously. The hopper level sensors maintain hassle free material supply operation. Page 39 of 74

40 Figure 4.2-2: Line of productionof pellets Page 40 of 74

41 Page 41 of 74

42 Page 42 of 74

43 4.3. HUMAN RESOURCES POLICY OF PROJECT Managerial personnel of direction will ensure general management of the enterprise, starting from the period of its organization and actual beginning of production, including management of current production and financial activities of the enterprise. Administrative and production personnel will be formed to ensure beginning of full-scale operation of the enterprise. It is planned to involve such personnel from population residing in the region of production site. In order to ensure functioning of plant for production of granules it will be necessary to employ 5 persons. Staff schedule of project is as follows: Table 4.3-1: Staff schedule of project No. Position Number Monthly salary per 1 person Salary budget Unified social tax Gross labor expense Start of work 1 Manager ,8 Month 1 - ongoing 2 Workers - production line operators ,6 Month 6 - ongoing 3 Load/unload, distribution worker ,6 Month 6 - ongoing Total monthly salary budget for whole personnel amounts to 1586, namely: Salary 1233 Unified social tax 353 Requirements for workers having access and involved in production process: Personnel involved in production processes of plant should know process guidebook and labor safety guidebook. Only the persons, who have passed preliminary medical examination for employment and regular medical examinations in process of their work, have access to work. Labor and fire safety training of personnel is mandatory. Only the persons with necessary professional experience have access to work with equipment used at the plant. HR policy of the enterprise should be aimed at optimum delegation of powers and formation of responsibility for taken decisions. The enterprise should have well-balanced personnel remuneration system. Managerial objective in human resources management and HR policy is to achieve efficiency in the following functional areas: Page 43 of 74

44 Appropriate HR (determination of skills, knowledge and competence required for performance of job duties; HR planning, attraction and selection); Personnel training and development (personnel training, professional training, development of professional skills, personnel attestation); Regulation of labor relations and relations inside the team; Improvement of labor remuneration system (including non-material remuneration and bonus system at the enterprise); Guarantee of labor safety and health (labor safety and industrial safety system, mandatory medical control at the moment of employment and regular control during the period of work). Management of the company should conduct regular activities aimed at personnel motivation for work. Page 44 of 74

45 5. PROJECT FINANCIAL PLAN 5.1. PREREQUISITES FOR CALCULATIONS AND THEIR REASONING Initial data for calculations are conditionally divided into following groups: 1. Prerequisites for calculation of necessary investment Table in clause 2.2 on project investment was drawn up on the basis of information provided by company-initiator of project. 2. Prerequisites for shaping production and sales plan Stated in table below prerequisites for shaping production and sales plan under project were provided by company-initiator of project. Table 4.5-1: Parameters of production and sales 2. Working conditions of agricultural company 2.1 Volume of biomass from its own agricultural activities, tons per year Working conditions of plant for production of pellets Sale price of straw pellets, EUR 146 Processing volume (straw pellets), tons/hour 0,10 hours per day 16 operational working days per year 300 operational working days per month 25 Processing volume (straw pellets), tons/month 40 Processing volume (straw pellets), tons/year Prerequisites for costing under project Cost of raw material - biomass Expenditures connected with purchase of raw materials for production are calculated on the basis of material volume necessary for pellet production and market prices for such materials. The company can calculate 300 t biomass from its own agricultural activities; the remaining needed quantity will be bought from the near agricultural companies in order full operational capacity of the production plant to be achieved. Page 45 of 74

46 Volume of biomass from its own agricultural activities, tons per year 300 Biomass volume per month, tons 48 Biomass volume per year, tons 576 Remaining needed quantity of biomass, tons/year 276 Price of biomass, EUR/ton 18,03 Transport costs from biomass suppliers to the production facility, EUR/ton 6,84 Packing Straw pellets are packed in Big Bag 1000 kg and PVC Bag 15 kg. Value of one Big Bag 1000 kg is 7, 4 and of one PVC Bag 15 kg is 0, 08. Transport charges Transport charges are equal to3 % of sales volume. Communications: Internet & phone bills and Bookkeeping services Communications and Bookkeeping services are equal to 50 per month. General administrative expenses General administrative expenses were calculated on minimal sufficiency level necessary for effective functioning of company. General administrative expenses amounts to 2,5% of sales volume. Building and equipment repair and maintenance Building and equipment repair and maintenance are equal to 1 % per year of the initial cost. Marketing expenditures Dimension of marketing expenditures is determined as per cent of sales and marketing specialists point it out as the most effective method of advertisement budget planning. Thus, in the process of marketing expenditures calculation, taking into account corresponding market targeted for company, and also operating expenditures, this item of budget amounts to 2,5% of sales volume that will ensure enough level of company s profitability. DA SE DOPOLNI Page 46 of 74

47 Consumption of electric energy by equipment Expenditures related to electric energy consumption are calculated upon actual electric energy consumption of the equipment and current tariffs. Page 47 of 74

48 5.2. SALES FORECAST FOR PROJECT Total sales volume for 6 years of project is planned to be on the level of Table 5.2-1: Sales forecast for project Project period 1st year 2nd year 3rd year 4th year 5th year 6th year TOTAL Straw pellets Sale price of straw pellets, EUR/ton Sales volume of straw pellets, tons Revenues from sales, EUR TOTAL SALES Page 48 of 74

49 5.3. PROFIT GENERATION FOR PROJECT For whole forecasting period exponents of profit and loss allow to form volume of earned net profit. (Annex No 10). Table 5.3-1: Profit and Loss Statement Project period 1st year 2nd year 3rd year 4th year 5th year 6th year TOTAL Total revenues VAT Gross profit margin Cost of sold products (services) Raw material - biomass Transport costs from biomass suppliers to the production facility Packing Transport charges Consumption of electric energy by equipment Salary for production personnel Unified social fees Gross Profit Salary of administrative personnel Unified social fees Communications: Internet & phone bills Bookkeeping services Page 49 of 74

50 Project period 1st year 2nd year 3rd year 4th year 5th year 6th year TOTAL General administrative expenses Marketing expenditures Building and equipment repair and maintenance Rental cost EBITDA Amortization EBIT Equity income Financial income Equity expenses Financial expenses Earnings before interest and taxes Income tax (calculated) on an accrual basis Income tax (total) Net Profit / Loss Page 50 of 74

51 Profit generation is reflected in table and also on figure in accordance with forecast calculations of profit and loss. Table 4: Profit generation Item 1 st year 2 nd year 3 rd year 4 th year 5 h year 6 h year Total revenues from sales Operating expenses Net profit ,000 70,000 60,000 50,000 40,000 30,000 20,000 10, st year 2nd year 3rd year 4th year 5h year 6h year Operating expenses Net profit Total revenues from sales Figure 3.3-1: Net profit generation The table presents stage-by-stage formation of operating profitability with account for different factors: Gross profit Margin (%) gross margin reflects operating profitability with account for cost of manufactured products. EBITDA Margin (%) reflects operating profitability with account for all operating expenses before amortization, interest and taxes. Ordinary Income Margin (%) reflects operating profitability with account for operating expenses and amortization before interest and taxes. Return on sales (%) margin on sales reflects operating profitability with

52 Table 5.3-3: Project analysis of profitability Item 1st year 2nd year 3rd year 4th year 5h year 6h year Total Revenues Gross Profit Gross profit Margin (%) 48% 48% 48% 48% 48% 48% EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) EBITDA Margin 17% 23% 23% 23% 23% 23% EBIT (Earnings Before Interest and Taxes) Ordinary Income Margin 11% 16% 16% 16% 16% 16% Net Profit / Loss Return on sales (%) 10% 8% 9% 11% 12% 14% 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, st year 2nd year 3rd year 4th year 5h year 6h year Total Revenues Gross profit Margin (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 5.3-2: Dynamics of total revenues and gross profit margin Page 52 of 74

53 12,000 10,000 8,000 6,000 4,000 2, st year 2nd year 3rd year 4th year 5h year 6h year Net Profit / Loss Return on sales (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 5.3-3: Dynamics of net profit and return on sales Profit generation within the entire analyzed period with account for influence of different factors is stated in Annexes No.1 and FORECAST OF CASH FLOW FOR PROJECT Proceeds under project Proceeds under project consist of following items: 1) Proceeds from investment 2) Revenues from sales of products Investment will come within 5 months of project period in total amount of in order to finance investment expenditures of project in accordance. Revenues from sales will start: Straw granules from sixth month. It is forecasted that for 6years of project implementation total revenues will amount to Payments under project Payments under this investment project are as follow: 1) Investment expenditures; 2) Operating expenses; 3) Tax deductions to budget. 4) Financial costs Page 53 of 74

54 Total payments for financing of investment expenditures amount to : Table 5: Investment expenditures under project Capex Production facility Production line Purchase of raw material Packing equipment (with transport and VAT) Packing materials Forklift Transport vehicle Amount of total operating expenses under project for6years is equal to , without VAT. Table6: Operating expenses Expenses In total for 6 years, without VAT Share in total expenses Share in net profit Raw material - biomass ,8% 7,1% Transport costs from biomass suppliers to the production facility ,1% 2,7% Packing ,6% 4,4% Transport charges ,4% 3,5% Consumption of electric energy by equipment ,9% 14,4% Salary for production personnel ,9% 9,2% Salary of administrative personnel ,6% 16,2% Communications: Internet & phone bills ,3% 0,9% Bookkeeping services ,3% 0,9% General administrative expenses ,5% 3,0% Marketing expenditures ,5% 3,0% Building and equipment repair and maintenance ,3% 0,9% Page 54 of 74

55 Expenses In total for 6 years, without VAT Share in total expenses Share in net profit Rental cost 0 0,0% 0,0% Total operating expenses % 66% Perspective structure of operating expenses 4.5% 1.3% Raw material - biomass 1.3% 1.3% 4.5% 10.8% 4.1% Transport costs from biomass suppliers to the production facility Packing 6.6% Transport charges 24.6% 5.4% Consumption of electric energy by equipment 21.9% Salary for production personnel Salary of administrative personnel 13.9% Communications: Internet & phone bills Figure : Structure of operating expenses Payments to the budget include: Value added tax; during the Project period its amount will reach Uniform social fee charged on personnel salary payment fund in amount of Tax on profit in amount of Financial costs Financial costs include: Page 55 of 74

56 Credit body repayment Payment of interest More detailed information on cash flow under this project is stated in Annex No CREDIT STRUCTURE SUBSTANTIATION Schedule of receipt and repayment of credit received (Annexes No. 6) is prepared according to the following expected terms and conditions of credit receipt: Credit period 6 years. Interest for use of credit capital will reach 7.5% per annum. Benefits for credit repayment 12 months. Credit receipt and repayment schedule is as follows: Table 5.5-1: Credit Receipt and Repayment Schedule Month Amount drawn down Total drawn down Monthly interests Credit repayment Total payable Repayment balance Page 56 of 74

57 Month Amount drawn down Total drawn down Monthly interests Credit repayment Total payable Repayment balance Page 57 of 74

58 Month Amount drawn down Total drawn down Monthly interests Credit repayment Total payable Repayment balance ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Drawdown Credit repayment Interest payment Credit debt Figure 5.5-1: Credit Servicing Schedule Page 58 of 74

59 Table 5.5-2: Schedule of use and return of the credit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total Drawdown Credit repayment Interest payment Credit debt Breakeven point for Project Breakeven point is calculated for straw granules. In order to ensure breakeven production volume, namely: volume under which total expenses incurred for production and sales of products are equal to revenues from sales of products, and profit equals to 0, it is necessary to produce and realize such volume of products as stated below: Table 7: Breakeven production volume Products Breakeven volume in natural form Breakeven volume in monetary equivalent 1 year t year t Minimal value of one item of product in order to receive 0 profits, i.e. work in breakeven point, should be as follows: Table 5.6-2: Minimal value of one item of product Product Minimal value of one item of product, /t without VAT 1 year 107, year 100,10 Financial safety margin is how much output or sales level can fall before a business reaches its breakeven point. Page 59 of 74

60 Table 5.6-3: Financial safety margin Product Financial safety margin, % 1 year 24% 2-6 year 34% Calculation of breakeven point is stated in Annex 14. Page 60 of 74

61 5.7. ASSESSMENT OF INVESTMENT ATTRACTIVENESS FOR PROJECT Calculation of discount rate Discount rate is a rate expected to be received by purchaser or investor from own means invested in project. In our calculation we used model of discount determination by weighted average cost method. In accordance with this model discount rate (WACC Weighted Average Cost of Capital) is determined as stated below: WACC kd wd * 1 tc ks ws Where: Kdis a value of involved investments, which is calculated in accordance with current value of credit facilities attraction 7.5%; Wdis ashare of attracted credit facilities in capital of company 100%; Tcisincome tax rate 10%; Ksisinequity cost of capital, in this project profit refinancing (in the process of calculation average rate on deposit in USD was applied, as alternative for allocation of own means) 10%; Wsis a share of own equity in capital of company 0% Thus, discount norm by WACC method in the period of project implementation for company will amount to 6.8%. WACC 1 0,1 10% 0% 6.8% 7.5% 100%* At this level of discount we received the following exponents, which characterize efficiency of project implementation: Table : Measures of efficiency Measures Measure unit Value Project payback period - PP months 55 Discount payback period - DPP months 63,68 Project period - PP months 72 Net Present Value - NPV EUR Internal rate of return - IRR % 11,4% Profitability index - PI unit 1,03 Return On Sales, Net Profit Margin - ROS % 12,5% Return on investment - ROI % 52% Page 61 of 74

62 Net Present Value Net Present Value (NPV) In accordance with table Net Present Value amounts to This exponent is more than «0» that confirms project profitability and certifies that all monetary proceeds exceed invested in project monetary means to 7 108; and this fact confirms high efficiency of investments. NPV is a difference between all monetary proceeds and payments made till current moment (moment of investment project assessment). NPV reflects amount of monetary means expected to be received by investor after coverage of initial investment expenditures and periodical money payments connected with implementation of project. Whereas money payments are estimated with account for their value in time and risks, NPV can be interpreted as value added by project. It also can be interpreted as total profit of investor for project period received from investments for its implementation Internal rate of return (IRR) Calculation of net internal rate or return (IRR) is stated in AnnexNo.15. Internal rate of return (average return on capital employed, as ensured by this investment project) equals to 11.4%. Internal rate of return determines maximal value of attracted investment means, at which investment project remains investment-attractive. In other words, it is an average return on capital employed, as ensured by this investment project, i.e. efficiency of investment in this project is equal to efficiency of investing by 11.4% in any financial instrument with regular return. 2,000 1,500 1, ,000-1,500-2,000-2,500 10% 11% 12% 13% Discount rate Internal rate of return (IRR) Figure : Internal rate of return Thus, at zero return on investment internal rate of return is higher than planned discount rate of cash flows, which amount is on the level of 6.8%. Page 62 of 74

63 Discount Value 0 year 1st year 2nd year 3rd year 4th year 5h year 6h year Discount payback period Discount payback period is months. It means that within 5.31years project will be fully paid back with account for discount factor. 20,000 10, ,000-20,000-30,000-40,000-50,000-60,000-70,000 Years of life cycle Figure 4: Project payback period Profitability index Under this project profitability index, as correspondence of real value of expected cash flows to initial expenditures (amount of investments), equals to 1,03 that has the following meaning: each monetary unit spent by investor will bring 1,03 monetary units of revenues in the process of project implementation. Return on investment reflects amount of net profit received in the result of investment in project and is equal to 52%. In other words, each euro will bring to company 0.52 euro for66 years of project implementation. Return on Sales is used for control over cost of sales products as well as changes in company s price-formation policy and also characterizes operating efficiency of company. Return on Sales is equal to 12.5%. It means that each euro of revenue will bring company 0,125 euro of net profit. Detailed calculation of investment exponents is stated in Annex No.15. Page 63 of 74

64 5.8. PROJECT DEVELOPMENT FORECAST Whereas it is impossible to give 100% forecast on future activity of complex described in this project, it is necessary to take into account different variants of possible deviations. In order to determine possible risks of project implementation, we would like to consider four scenarios of project development: 1) Change of price for products of complex: Table 5.8-1: Sensitivity of project to change of price for products Change of price -2,0% -1,0% -0,5% 0,0% 5,0% 10,0% 15,0% NPV IRR 7,4% 9% 10% 11% 21% 31% 41% DPP, years 5,90 5,59 5,44 5,31 4,27 3,60 3,12 Change of price for products can be caused by one or several reasons: Increase of business competition. Change of competitors price offers for analogical assortment. Change of demand on products. Introduction of state regulations with regard to prices. Introduction of changes to cost of manufactured products. Consumers are not satisfied with quality of products realized by company; Worsening of pricing environment bio-fuel market. Therewith correlation between price for products and NPV of project is as follows: 20% 10% 0% -10% -20% -30% -40% NPV Change of price 60,000 50,000 40,000 30,000 20,000 10,000 0 Figure 5.8-1: Correlation of NPV and prices for products Page 64 of 74