Essential Oil Processing Unit

Establishment Plan

Prepared for
Tinjure Herbs Cooperative Society
Limited
Ambung -2, Tehrathum
2062 (2005)

Prepared by
Khilendra Gurung
&
Kabita Adhikari
September 2005
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 PROJECT HIGHLIGHTS
(At 50% capacity utilization)

1. Name of Cooperative: Tinjure Herbs Cooperative Society Limited

2. Proponents: Local communities of Ambung VDC and adjoining

areas

3. Project Location: Ambung-2, Bhotechhap, Tehrathum, Nepal

4. Products: Essential oils (Artemisia oil, Calamus oil, Ginger oil and
Amomum oil)

5. Production Capacity: 250 kg Artemisia oil, 150 kg Calamus oil, 50 kg Ginger

oil and 100 kg Amomum oil (annual)

6. Target Market: Essential oil exporters, essential oil traders, essential oil
based herbal care products manufacturing
companies/industries, cosmetics/toiletries products
manufacturing companies/industries in Kathmandu

7. Raw Material: 75,000 kg Titepati, 15,000 kg Bojho, 15,000 kg Aduwa

and 1,000 kg Alaichi (annual)

8. Fuel (Firewood): 85790 kg (annual)

9. Manpower: 7 persons

10. Beneficiaries: 750 households

11. Total Capital: Rs 2,797,400/-

12. Fixed Capital: Rs 1,797,400/-

13. Working Capital: Rs 1,000,000/-

14. Annual Sales Revenue: Rs 1,580,000/-

15. Pay Back Period: 8.11 years

16. Break Even Point: 2.11 % / Rs 33,363.03/- (for each item)

17. Return on Investment: 9.02 % (annual)

18. Net Present Value: (Rs 890,997/-) at 20% discount rate over 10 years

19. Profitability Index: 0.52

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 CONTENTS
1. INTRODUCTION 1
1.1 Background 1
1.2 Present Situation 1
1.2.1 Raw material supply 1
1.2.2 Resource management and its sustainability 2
1.2.3 Essential Oil Enterprise 2
1.3 Tinjure Herbs Cooperative Society Limited 3
1.4 Local Beneficiaries and Benefits 3

2. GOALS AND OBJECTIVES 4

3. MARKETING MANAGEMENT 4
3.1 Existing Market 4
3.2 Marketing Strategy 5
3.2.1 Products 5
3.2.2 Price 6
3.2.3 Distribution 6
3.2.4 Promotion 6

4. TECHNOLOGY/PRODUCTION 7
4.1 Cooperative Site 7
4.2 Production Capacity 7
4.3 Requirements for Production 7
4.3.1 Building/Store 7
4.3.2 Machinery, Equipments and Accessories 7
4.3.3 Other Infrastructure 8
4.3.4 Raw Material 8
Transportation and Storage 8
4.3.5 Supportive Materials 9
4.3.6 Fuel/ Energy 9
4.4 Product Specification and Quality Control 9
4.5 Extraction Process 10
Extraction Method of Essential Oil 10
Steam Distillation Process 10

5. MANAGEMENT 11
5.1 Ownership and Organizational Structure 11
5.2 Management Team 11
5.2.1 Management Board 11
5.2.2 Manager 12
5.2.3 Technicians 12
5.2.4 Labours and Office Assistant 12
5.3 Remuneration 13
5.4 Supervision, Monitoring and Evaluation 13
5.5 Other Stakeholders 13
5.5.1 Collectors/Suppliers 13
5.5.2 Forest User Groups 13
5.5.3 Traders 14
5.5.4 Other Firms 14

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5.5.5 Funding Institutions 14
5.5.6 Assisting and Regulatory Institutions 14

6. RISK ANALYSIS AND MITIGATION STRATEGIES 15

6.1 Raw Materials 15
6.2 Fuel/Energy 15
6.3 Sales 15
6.4 Manpower 16
6.5 Policies, Rules and Regulation 16
6.6 Competition and Market Share 16
6.7 Quality Control 17

7. FINANCIAL ASSUMPTION AND MANAGEMENT 17

7.1 Total Capital and Its Sources 18
7.1.1 Capital Requirement 18
a. Estimation of Working Capital Requirement 18
b. Fixed Capital 18
1. Fixed Assets 18
2. Pre-operating 18
7.1.2 Sources 18
7.2 Fixed Assets Management 18
7.3 Fixed Costs. 19
7.4 Variable Costs 19
a. Raw Materials and its Inventory 19
b. Energy Expenses 19
c. Supporting Materials 20
d. Manpower and Selling Expenses 20
7.5 Sales Projection 20
7.6 Income Statement 20
7.7 Cash Flow Statement 20
7.8 Balance Sheet 21
7.9 Financial Analysis 21
™ Pay Back Period (PBP) 21
™ Break Even Point (BEP) 21
™ Return on Investment (ROI) 21
™ Net Present Value (NPV) 21
™ Internal Rate of Return (IRR) 21
™ Profitability Index (PI) 21
Sensitivity Analysis 21

8. PLAN OF OPERATION 22

9. CONCLUSION 22

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1. INTRODUCTION
1.1 Background
Tehrathum district is situated in the high hills of the eastern part of Nepal. It is
surrounded by Taplejung in the east, Dhankuta in the west, Sankhuwasabha in the north
and Pachthar in the south. The district is remote and poor in terms of infrastructure
development and economic conditions of the people living in the area. However, it is rich
in renewable natural resources. Non Timber Forest Products (NTFPs) are important
resources of the district, whose sustainable utilization could play crucial role in the
economic development of the region. Tehrathum harbors many NTFPs but very few
enterprises utilize them to generate income for the poorest people of the district.
Considering the ecological, social and economic development of the region, an essential
oil distillation enterprise has been chosen as it ranked top among the products evaluated
in the feasibility study with the local communities. The main reasons for selecting the
essential oil distillation enterprise are as follows:
¾ Large collection base and potential to harvest commercial quantities on a sustainable
basis
¾ High demand for the product and accessible in established markets.
¾ Viable technology for the enterprise.
¾ People are interested and able to run the enterprise.
¾ Resource management system can be institutionalized.
¾ Low cost involvement for the enterprise development and high employment
generation through the enterprise.
¾ Fair returns to the capital and the labor involved in the enterprise.
¾ Supportive policy for the resource management and commercialization of the
product.
¾ A large number of people can participate in the enterprise activities.
¾ A single community can sustain the enterprise in terms of raw material and
manpower supply. It makes it is easy to manage the enterprise and less complicated in
the distribution of benefits to the people.

To initiate the business based conservation and development program in Tehrathum,

Ambung and adjoining VDCs were identified based on the raw materials, interest of the
community, easy accessible and the possibilities of institutionalizing sustainable
harvesting of the raw materials.

1.2 Present Situation

1.2.1 Raw material supply
The raw materials to be used in this enterprise are Titepati (Artemisia vulgaris), Bojho
(Acorus calamus), Aduwa (Zingiber officinale) and Alaichi (Amomum subulatum) at
present. Titepati and Bojho are naturally found in the marginal and wastelands of
Ambung and its adjoining VDCs, at an elevation between 700-2,000m in Tehrathum.
Major portion of Titepati will be collected from all areas of Ambung and Jirikhimti
VDCs; whereas it will be collected as complements from the motorable road accessible
areas of Solma, Sungnam, Basantapur, Myanglung and Sabla VDCs. Bojho will be
harvested from waste swampy lands of Ambung, Jirikhimti, Solma, Sungnam, Sabla,
Tamphula, Myanglung, Piple, Morahang, Srijung, Pouthak, Oyakjung, Jaljale and Simle

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VDCs. Aduwa and Alaichi are cultivated in large scales in the district by the local
community. They can be easily available as stocks in the warehouses located in Jirikhimti
bazar. Particularly, Ambung and its adjoining VDCs are rich in terms of resource stocks.
It has thousands of hectares of lands (marginal lands, forest lands and cultivated lands)
where the raw materials are abundantly found. The participatory resource assessment
with local communities revealed that the sustainable yield of Titepati, Bojho, Aduwa and
Alaichi in the areas is about 10 ton, 2 ton, 20 ton and 200 ton respectively in the
collection areas. Based on this rough estimation, the area can feed such enterprise that
would produce Artemisia oil 500 kg, Calamus oil 250 kg, Ginger oil 1,000 kg and
Amomum oil 20,000 kg annually. People of the area generally collect Titepati in May-
June, August; Bojho in March-April, August-September; Aduwa in March-May and
Alaichi in September-October of the year. The cultivation and collection of Alaichi and
Aduwa in the area started since three decades. However, the commercial collection of
Titepati and Bojho has not been started yet.

1.2.2 Resource management and its sustainability

Resource management of forest products in community forests is not new for Nepal.
Since 1978, forest user groups (FUGs) of Nepal have been managing timber forest
products according to their operational plan. NTFPs management is a new issue for most
of the FUGs in Nepal. Nevertheless, few FUGs in Nepal have started managing their
NTFPs in community forest areas.
In Tehrathum, the community forest user group (CFUG) is not managing NTFPs in its
community forest area. The forest based enterprises get permits from the district forest
office to collect the raw materials. But in practice the collection takes place prior to the
issuing of the permits. It is also common for the different communities to collect NTFPs
in their leisure time. They usually do not consider the proper harvesting period and
method. This occurs because the collectors are unaware of the harvesting system and do
not get incentives to manage it. The district forest office cannot monitor all the harvesting
activities done in the national forest areas since they have no adequate staffs. The local
communities are also not capable or interested to manage it due to lack of tenure rights
over the resources. Hence, community forestry activities could be the best measure for
resource conservation and management. District forest office and some non governmental
organization provide training on proper harvesting of NTFPs to the collectors; but
resources cannot be managed properly unless the management system is institutionalized.
The above stated policy implies for Titepati and Bojho but not for Alaichi and Aduwa,
since they are cultivated in private lands and the owner manages to adopt the best
techniques.

1.2.3 Essential Oil Enterprise

In Tehrathum district there is no enterprise that can process aromatic plant parts to
essential oils. Therefore, this proposes processing unit will be the pioneer one in the
district as a whole. Establishment of this unit will add value to the unused aromatic herbs
as Titepati and Bojho and will create the employment opportunity to the rural poor people
of the area. On the other hand, the unit will process the agro products as Aduwa and
Alaichi cultivated by the farmers in their private lands, thus mitigating the price
fluctuation of these crops.

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The new processing unit is expected to get support and coordination from the district
forest office, donor agencies working in the district, local NGOs/CBOs working in the
field of natural resources and the local community.
The Cardamom oil that is supposed to produce by this new unit will be the first in Nepal.
However, Artemisia oil, Calamus oil and Ginger oil are produced by various
cooperatives/ industries in the other districts. Therefore, the unit will have to overcome
the marketing challenge of these essential oils. Nevertheless, the unit is committed to
market these products by forming the network with the essential oils exporters of Nepal.

1.3 Tinjure Herbs Cooperative Society Limited

Tinjure Herbs Cooperative Society Limited is owned by local communities of Ambung
VDC and adjoining areas. The cooperative intends to generate profits and employment to
the local people to create an incentive so that they will be interested in sustainable
management of the resource base. It will help upgrade the economic condition of the
local collectors and farmers providing the opportunities to collect/harvest and sell the raw
materials.
The success of this cooperative is measured by its economic return to the local
communities and its effective management of the resources. The cooperative will create
incentives to those poor people who are heavily dependent on the forests for their
livelihood for conservation and management of the resource. With the establishment of
this cooperative, those people who are only the collectors of the NTFPs and the suppliers
of the raw materials will become the owners of the cooperative and managers to utilize
and conserve their natural resource on a sustainable basis.

1.4 Local Beneficiaries and Benefits

In addition to creating new jobs, the enterprise will help the collectors earn additional
income by adding value to the products they sell through improved processing and
marketing. The primary beneficiaries from this cooperative are the members forest user
groups. About 750 households own this cooperative through their forest user groups and
entertain the profits generated from it. They get a fair price for the collected raw materials
and firewood that is primarily use for processing. The cooperative will also provide
handsome amount to the forest user groups as a forest product collection fee. The
cooperative employs about 7 local people for extracting essential oils thus creating
employment for many more in seasonal and casual activities. Nearly 250 households in
adjacent communities are the secondary beneficiaries of this cooperative who are
benefited by selling the raw materials to the cooperative. Roughly half of the
primary/secondary beneficiaries in these households are women. The cooperative
generates annual income of about Rs 755,000/- for the local suppliers/collectors of raw
materials and firewood and about Rs 276,000/- for direct employees in this cooperative.
Other income generating opportunities also exist for those who transport packaging
materials for the cooperative.
The cooperative also uses sustainable economic gain as the primary incentive for natural
resource conservation. In addition to the monetary benefits that will most likely come
from increases in the sales value of the final product sold, there will also be advances in
improved environmental management, community empowerment and a better quality of
life.

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2. GOALS AND OBJECTIVES
The main goal of the cooperative is to generate income for shareholders of the
cooperative and provide incentives to local people to conserve and manage the resources
in a sustainable way. To achieve this goal, the cooperative has set the following
objectives:
¾ to generate profit to sustain the enterprise, provide benefits to shareholders and the
community, and create funds for resource conservation;
¾ to generate income to local people by linking markets for collected NTFPs;
¾ to generate employment for the local people and transfer entrepreneurship skills to the
local community;
¾ to provide royalties and strengthen the forest user groups for management of forests;
¾ to provide conservation education, training and other inputs for development of the
resource.
The cooperative has also established the following financial goals:

Finance: By the end of the first year of operations, the cooperative will carefully
evaluate and plan investments and budget expenses to generate a consistent 30% pretax
profit. The cooperative will continue to generate between 30%-35% pretax profits over
the next five years.

3. MARKETING MANAGEMENT
3.1 Existing Market
The utilization of essential oil is very extensive and covers a wide range of human
activity. Some of the important uses are as; ingredients in the manufacture of soaps,
cosmetics, perfumery, health care herbal products, confectionary, aerated water, syrups,
disinfectants, insecticides, fungicides, paper writing pads, greeting cards etc.
The world's total production of essential oil is estimated at about 1, 00,000 to1, 10,000
tons. But, Nepal shares a negligible percentage of essential oil in terms of production
despite its rich aromatic floral diversity. Most of the essential oil produced is exported,
while few amounts are marketed within the country. This oil is very expensive and earns
good revenue in terms of foreign exchange.
The demand for essential oil is increasing day by day within the country with the
advancement of education and prosperity in the country. Fragrance plays a vital role in
securing consumer's acceptability in almost every product used. The following are the
reasons for the scope of essential oil:
• Essential oil is now a basic raw material for consumer products meant for mass
consumption.
• The interest in aromatics for their therapeutic value is increasing due to the
worldwide scare of the side effects of synthetics, also the revival of interest in herbs.
• Essential oil has the potential of being very safe insecticide. It has been found very
effective and safe for the production of food grains.
• The by products of aromatic plants can be used as a mulching material, fuel, cattle
feed or ploughed back to soil to improve fertility.

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 The existing selling prices of different essential oils in Nepal are as follows:

SN Essential Oils Price Per Kg (Rs)

1 Abies oil 3,500-4,000/-
2 Amomum oil 2,000-2,100/-
3 Anthopogon oil 4,500-5,500/-
4 Artemisia oil 2,300-2,500/-
5 Calamus oil 1,700-2,000/-
6 Chamomile oil 11,500-12,600/-
7 Citronella oil 400-440/-
8 Eucalyptus oil 560-800/-
9 French basil oil 3,000-3,800/-
10 Ginger oil 10,500-11,000/-
11 Jatamansi oil 6,500-8,900/-
12 Juniper needle oil 2,200-2,500/-
13 Lemongrass oil 660-710/-
14 Mentha arvensis oil 550-710/-
15 Palmarosa oil 850-945/-
16 Sugandha kokila oil 3,500-4,250/-
17 Valerian oil 20,000-21,000/-
18 Wintergreen oil 900-1,050/-
19 Zanthoxylum oil 3,500-4,000/-
20 Zedoary oil 3,000-3,800/-
Source: Herbs Production and Processing Co. Ltd. and Himalayan Bio Trade P. Ltd,
Kathmandu

There is a huge market of essential oils in Western countries with an increasing trend.
The main importers of essential oils from Nepal are Germany, France, United Kingdom,
United States, Italy, Belgium and Spain.

3.2 Marketing Strategy

The cooperative will offer its products to the buyers in Kathmandu at negotiated prices.
The cooperative will attempt to make an association with other similar processing
company/industry/cooperative to increase its bargaining capability. However, it will try
to differentiate its products as superior ones in the market of essential oils and promote its
image as an eco-friendly and community concerned enterprise. Furthermore, the
cooperative will prepare the letter of intent for partnership and ultimately the contracts
with the potential buyers (wholesalers and exporters) of essential oils in Kathmandu. The
lists of potential buyers are presented in annex-13.

3.2.1 Products
The Cooperative will initially process Artemisia oil and Calamus oil for Kathmandu
market. Depending on the market demand, it will add to its product line with Ginger oil
and Amomum oil. The most profitable essential oil will hold the major share of
production in this cooperative. The cooperative will pay close attention in maintaining

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quality of oils and it will also maintain the consistency oil quality. To produce high
quality products, the cooperative will introduce an effective monitoring mechanism.
The essential oils are measured in kilogram. These finished products will be packaged in
epoxy coated metal container or/ aluminum container or/ HDPE; US approved food grade
container and the container will be labeled.
The cooperative will get feedback and inputs from its customers to improve the quality
and will try to meet their needs. The cooperative will attempt to satisfy the market
demand and obtain higher returns.

3.2.2 Price
The cooperative will offer its product at an appropriate rate factoring the cost of
production and distribution, target of profits, and competitor's offer in the market. At the
initial stage, market price dictates the price of its products. The cooperative will give
more focus on gaining better price rather than increasing its market share or sales
volume.
Wholesalers and exporters are the main target customers of the essential oils produced by
this cooperative. Later, international market opportunities will be explored in order to
gain a better price for its products.
The cooperative targets selling Artemisia oil at Rs 2,300/- and Calamus oil at Rs 1,700/-
in Kathmandu at the initial stage. If the market demands for other oils (Ginger oil,
Amomum oil), the cooperative will produce accordingly and price its products
considering the going rate, cost of production, target of profit, and perceived value of the
market for the products.

3.2.3 Distribution
The cooperative entertain various types of marketing and distribution channels. Firstly, it
will try to distribute its products directly to the essential oil exporters in Kathmandu.
Then it will target different herbal products producers as cosmetics, soaps, perfumery,
health care herbal products, confectionary, insecticides, fungicides and so on.
The cooperative can distribute the products in Kathmandu or other parts of Nepal as well.
It will choose the most profitable mode of distribution.

3.2.4 Promotion
The cooperative will entertain various types of promotional activities that are appropriate
for selling its products. The cooperative will prepare good quality products with safe
packaging, which can meet the needs of the buyers. On the label, it will read the name of
cooperative, name of items, batch no, net content, weight of container, and other useful
information according to the market demand.
The cooperative staff will meet personally and send business offers to potential buyers. It
will provide samples of products to prospective clients who show interest. It will also
approach the companies nationally and abroad that promote the eco-friendly and socially
equitable business. It will explore the opportunities of participation in an association of
herbs and herbal products, as well as enter into promotional meetings and campaigns.
The cooperative will seek opportunities to form strategic alliance with various business
companies and organizations for promoting its products and the cooperative image. It
will further explore e-commerce (internet) for marketing.

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4. TECHNOLOGY/PRODUCTION
4.1 Cooperative Site
Tinjure Herbs Cooperative Society Limited will be situated in Ambung VDC, ward no.-2.
This processing cooperative will be established in an open area where sun exposure and a
permanent source of water are guaranteed. The cooperative will acquire about 5-13-0-0
of land for the processing of essential oils. This processing site will be near to the
settlements of Sansari, motorable road accessibility for the main beneficiaries. It is also
near to the resource base and within the distance of fifteen minute from Jirikhimty Bazar,
the main trading centre of Tehrathum.

4.2 Production Capacity

The processing unit is expected to run 8 months a year. The unit can process 75,000 kg of
Titepati, 15,000 kg of Bojho a day to produce 250 kg of Artemisia oil and 150 kg of
Calamus oil at 50% capacity in the first year.
The unit will increase its production capacity by 10% per year to achieve 100% capacity
at sixth year of operation. While calculating the capacity of the production, capacity of
fixed assets of the unit, capacity of local manpower, potentiality of local management,
technology of processing, and productivity and supply situation of various inputs have
been qualitatively and quantitatively studied.

4.3 Requirements for Production

4.3.1 Building/Store
A 2 storey house of 903 sq feet will host the essential oil processing unit. The house will
be made out of timber, stone, mud and roofing with stainless steel. The house will be
divided into three parts; one big room will be used for operational activities while the
other room will be for a storeroom for raw materials. The remaining room accommodates
the finished products and will serve as an office room.

4.3.2 Machinery, Equipments and Accessories

Essential oil extraction process involves a steam distillation technology. The main tool
for the processing is a distillation unit consisting of vessels, condenser, receiver and
steam pipeline with valves. They are usually made up of wrought or cast iron. The
cooperative will use a boiler made up of iron. The following is the list of main
machinery, tools and accessories for the cooperative. See annex 2 for the details along
with the price.

SN Items No. Descriptions

1. Steam distillation Made of iron (Mild Steel); Capacity, 1200 Lts.
unit (M/S)
a. Vessel 1 Made of 4mm thick insulated by glass wool
b. Condenser 1 Shell and tube type
c. Receiver 1 Made of 2mm thick
d. Steam pipe line 1 With valves, fitting & vapor line.
e. Boiler 1 Husk / Wood fired, Capacity, 300 Kg/hour
2. Weighing balance 2 One small for weighing the oils and another big one

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 for weighing the raw materials and firewood.
3. Containers 40 Metal/Aluminum/HDPE with 5kg, 10kg, 25kg,
30kg, 50kg capacity

4.3.3 Other Infrastructure

Regular supply of water is essential for the distillation unit. The water supply system will
be managed along with drainage facilities. The cooperative is not using any chemicals
during the extraction process, so there is less likely to be harmful effect to the
environment.
The cooperative will explore the fuel-efficient stove or try to install other efficient
mechanisms to steam water.
To facilitate carrying raw materials and oils, a trail road will be managed and the ground
inside the unit compound will be leveled off.
The office will be furnished with 5 chairs, 2 benches, 1 rack and 1 cupboard.

4.3.4 Raw Materials

The cooperative will purchase a sufficient quantity of good quality raw materials from
the collectors. It will have a strategy to obtain good quality raw materials by
discriminating against the poor quality raw materials and paying a lower price for it. Poor
quality materials could sometimes consume more time for processing and could
sometimes produce poor quality oils. The existing rate of Titepati/kg is Rs 2/-, Bojho is
Rs 10/-, Aduwa is Rs 20/- and Alaichi Rs 150/- in Tehrathum. The cooperative will
purchase the good quality raw materials at slightly higher price than the existing price.
The cooperative will also invest some amount in conservation and sustainable
management of the resource base. It will initiate a scientific harvesting system and other
management tools with the help of forest user group.

Transportation and Storage

The cooperative will purchase the raw material at the processing unit site and store it in
its storeroom. The cooperative will have raw materials storage in the collection season.
The inventory of raw material will be managed according to collection season and
operating period.
Normally collectors will bring the raw materials to the unit site. To gather the raw
materials from the adjacent areas, the cooperative will adopt two options for the
procurement of the raw materials. Firstly, it will send cooperative staffs to procure raw
materials to the collecting community and store it there. When the procurement at the site
is complete, the raw materials will be transported to the processing site. The second
option is for the enterprise to use the existing trading channels. Simply it will give the
responsibility of procurement to the commission agent and pay certain percentage of
payment to the commission agent. In this case, commission agent or cooperative both can
manage for transportation of raw materials. If the cooperative needs to be involved with
the transportation, it will pay relatively small amounts to the commission agents. When
the cooperative has to manage storage at a collection site, it will rent space on a
temporary basis.

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Storeroom at the cooperative site will be carefully managed with the capacity of storing
one season's supply of raw materials and finished products. It will be damp proof to
protect the products from any damage.

4.3.5 Supportive Materials

Packaging and labeling materials are the other needed materials which are essential for
the cooperative. Epoxy coated metal container/ aluminum container/US approved HDPE
food grade container will be used as packaging materials. The packaging will be in 5kg,
10kg, 25kg, 30kg, 50kg capacity, according to the demand of the buyers. Since the
market of the packaging materials is far from the production area or/ only available in
India, they will be procured by the sales person of the cooperative or order from India.
Each container with essential oil will be labeled. The label will include the information
about the cooperative, name of items, net content, weight of the container, raw materials
information etc. A labeling sticker will be prepared for each container.

4.3.6 Fuel/ Energy

Firewood is the main source of fuel for steaming the raw materials. Firewood will be
managed in community forest areas and will be harvested according to the operational
plan of the forests by community forest users. Dried firewood is brought at the factory
site. A fuel efficient stove will be used to reduce the quantity of firewood consumption.
The cooperative will consume roughly 90,000 kg of firewood a year. While the firewood
can be purchased from nearby communities, the inventory of the firewood will be kept
optimum leaping attention to the harvesting season of it and operation of the unit. A
minimum of one month's inventory will be kept as a security stock. In the season of peak
agricultural activities, the cooperative will maintain enough inventories to ensure smooth
operations during and post season.

4.4 Product Specification and Quality Control

Tinjure Herbs Cooperative Society Limited process Artemisia oil, Calamus oil, Ginger
oil and Amomum oil from Titepati (aerial parts with leaves), Bojho (rhizomes with
roots), Aduwa (rhizomes) and Alaichi (fruits / seeds) respectively. It will produce
Artemisia oil and Calamus oil in the first year of its production. From second year of
production it will start producing Ginger oil and Amomum oil as per the market demand.
The cooperative will not compromise with the quality to fetch a good price.
There will not be any chemical used in the processing procedure. The essential oils thus
produced are non-toxic, non-irritant and non-sensitizing to skin. However, care should be
taken to ensure that these oils would not contact with eyes, mouth and groin areas.
Quality control of essential is very crucial. To ensure it, the cooperative will make a
system of quality checks at various stages of oil extraction. Purchased raw materials will
be well stored. Foreign materials will be removed from the raw materials. The
temperature will be maintained constant throughout the extraction process. The amount
of water present in the essential oils will be separated up to its purity. The oils will be
filtered thoroughly ensuring no foreign particles other than oils remain in it. Each item of
the oils will be packaged in separate container to be sure that they would not intermix
with each other.

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Essential oils will be stored in sealed containers in dark and cool warehouse. Most
essential oil deteriorates through oxidation and polymerization upon prolonged exposure
to air and light. Without such precaution essences become less intense, grow darker and
more viscous, develop a bleaching effect and eventually changes into a brown, odorless
resin.
The manager of the processing unit will supervise all these handling procedures.
Prior to marketing, the essential oils items will be laboratory analyzed for its
specification. They will be sent to the authorized laboratory as Natural Products Research
Laboratory under Department of Plant Resources or/ laboratory of Herbs Production and
Processing Company Limited. Organo-leptic properties, physico chemical properties and
gas liquid chromatography (GLC) analysis will be performed by this laboratory.

4.5 Extraction Process

Extraction Method of Essential Oil
The basic methods of extraction of essential oil are distillation, effleurage, maceration,
solvent extraction, expression and supercritical fluid extraction. However, distillation has
always been the most widely practiced methods of essential oil extraction. Distillation
basically is the separation of components of a mixture of two or more liquids by virtue of
differences in their vapor pressure. The processing unit of the cooperative will adopt the
steam distillation method for extraction process of essential oils.

Steam Distillation Process

The steps involved in the steam distillation process of essential oils are as follows:
Procurement of raw materials, firewood, packaging and labeling materials
↓
Storage of purchased materials with care in the storeroom
↓
Raw materials are put in the vessel
↓
Water is put in the boiler and temperature is maintained
↓
Steam is subjected into raw materials
↓
Under the influence of steam, essential oil is freed from the glands of plant tissue
↓
Both water and essential oil vaporized
↓
Vapor condensed by an adjacent condenser
↓
Liquid drained into a receptacle
↓
Separation of essential oil and water
↓
Filtration of essential oils to remove dust particles
↓
Packaging, labeling and storage of essential oils

14
The same processing unit will be utilized for processing of all the four essential oils
(Artemisia oil, Calamus oil, Ginger oil and Amomum oil) for few years of its operation.
Titepati will be processed in fresh or semi wilted form soon after the collection in May,
June and August. Whereas Bojho, Aduwa and Alaichi can be processed at any season of
the year since they can be processed after the shade drying and can be stored for long
time.
After processing of each item of essential oil, the processing unit will be well cleaned
with hot water and properly sun dried followed by cleaning with rectified alcohol, in
order to exhaust the odour of previously distilled oil. Similar procedure can be applied
after distilling all items of essential oils, thus ensuring contamination of oils.

5. MANAGEMENT
5.1 Ownership and Organizational Structure
The owner of this cooperative are the local communities of the areas. Community forest
user groups and bilateral donors will be requested to invest some amount to operate the
unit. The cooperative management committee will be formed. The cooperative
management committee and the forest user group committee will supervise and monitor
the distillation unit and resource management activities. Business professionals and
technical manpower will run the distillation unit.

Organizational Structure of Tinjure Herbs Cooperative Society

Shareholders
↓
Management Board/ Board of Directors
↓
Managing Director
↓
Manager
↓
Technicians
↓
Labors
↓
Office Assistant

5.2 Management Team

The management team of the cooperative consists of board of directors, managing
director, manager, technicians and office assistant. The cooperative management will
cooperate and coordinate with other stakeholders while performing the distillation unit
activities.

5.2.1 Management Board

The cooperative members and representative of the forest user groups constitute the
board of this distillation unit. To monitor, supervise and assist the distillation unit
development and resource management activities, one distillation development
committee will be established from the local community. This committee serves as a

15
bridge between the community and the cooperative board. The members of forest user
group and NTFPs/Essential oil experts will provide advice and suggestions by
participating in the advisory board that is determined by the board. The board will make
policies and other high level decisions for the distillation unit development. A managing
director who is appointed by the board will supervise the distillation unit activities and
will direct the manager to achieve the objective of the cooperative. The board will recruit
the manager, and managing director of the board will recruit all the manpower for this
cooperative.

5.2.2 Manager
The cooperative employs a manager for the management of all the activities of this unit.
The manager will be accountable for all unit activities and will try to achieve the goals of
the cooperative. The main responsibilities of the manager are as follows:
¾ Procurement of the raw materials and others
¾ Manage the inventory of all the materials
¾ Manage the efficient production
¾ Control the quality of the product
¾ Supervise and motivate the manpower of the unit
¾ Keep the up to date account of the unit and get the auditing of accounts completed
¾ Analyze and control the financial activities
¾ Prepare the financial and unit operation report and submit to the board
¾ Manage the marketing activities of the oils
¾ Maintain good relationship with all stakeholders

5.2.3 Technicians
There will be 2 technicians in this distillation unit at the time of 100 % production
capacity but 1 technician at the initial stage of operation. They are accountable for the
efficient production of quality products. The main responsibility of the technicians is as
follows:
¾ Manage the efficient production process
¾ Extract the essential oils
¾ Control the quality of essential oils
¾ Supervise and motivate the subordinate workers of the unit and report to the manager
¾ Do the activities delegated and directed by the manager

5.2.4 Labors and Office Assistant

There will be 4 labors in this unit till fifth year of operation. They will assist the daily
unit activities. They are mainly responsible as follows:
¾ Assist in procurement, storing of raw materials, firewood and others
¾ Protect the unit assets, documents, etc.
¾ Assist in operation of the distillation unit
¾ Assist in quality control of essential oils
¾ Handle the distillation unit machinery at the time of production
¾ Packaging, labeling and transportation of the essential oils
¾ Manage the store activities
¾ Perform the activities as delegated and directed by the manager

16
5.3 Remuneration
The employees of the distillation unit will be compensated for their service on monthly
basis in the beginning period of operations. But once they become trained, per kg
remuneration system will be introduced. The initial compensation rate and expenses has
been given in annex- 5.

5.4 Supervision, Monitoring and Evaluation

The supervisory role is accomplished on different levels in the distillation unit. There will
not be any specific post to perform this function. The cooperative management
committee and forest user group committee will supervise the unit and resource
management activities and will give necessary inputs to the board of the cooperative. The
director of the executive board will supervise the performance of the manager of this unit
and look after all unit activities. He/she will add inputs for efficient management of the
unit. The manager is responsible for overall supervision of all the activities of the unit.
He/she will delegate some responsibilities of supervision of related activities to the
technicians of the unit. They are responsible for the efficient production procedures.
Among the labors, some efficient workers are delegated the responsibilities to supervise
the other workers of the unit. They will perform this activity with their other regular
work.

5.5 Other Stakeholders

Other stakeholders are groups that are not directly involved in the essential oil production
but have important roles and impact on the cooperative management and development
activities. Major other stakeholders are collectors/ suppliers, forest user group, traders,
other firms involved in the NTFPs business, supporting institutions and funding
institutions such as Chambers of Commerce, Agriculture Development Bank, and
Commercial Banks.

5.5.1 Collectors/Suppliers
The collectors provide raw materials and firewood to the distillation unit and suppliers
provide other materials as packaging and labeling materials. The collectors will collect
raw materials (Titepati, Bojho, Aduwa and Alaichi) and firewood from the private lands
national as well as community forest according to the provision of their operational plan
of the community forest user groups and forest rules and regulations. Unit management
will maintain smooth relations with these groups to obtain the inputs. The collectors will
be given instructions and training on the harvesting and post harvesting techniques in
collaboration with forest user groups. The management will compensate these groups for
their services and goods.

5.5.2 Forest User Groups

Forest user groups are those stakeholders who are most concerned with forest
management and utilization. Since the primary raw material and fuel comes from the
forest, the cooperative management will closely work and coordinate with them to obtain
the forest products. The forest user groups prepare and implement the operational plan for
their forest. The cooperative will obtain the forest products according to their operational
plan. They provide the collection license or permit to the collectors as per their

17
operational plan. While they issue the collection permit to the cooperative, the
cooperative will pay them a forest management fee as prescribed in the operational plan.
The cooperative will assist the FUGs to conduct the forest product harvesting and
management training.

5.5.3 Traders
The cooperative will develop a good relationship with the traders in performing its
business activities. The existing traders and commission agents can be used for obtaining
various inputs like raw materials, firewood, packaging materials, office supplies etc. The
cooperative can pass its products through traders to reach its target customer. When the
need arises and efficiency exists to use traders for supplying the inputs and marketing
products, the cooperative will manage the coordinated activities.

5.5.4 Other Firms

There would be competition in obtaining raw materials as Aduwa and Alaichi if
coordination does not exist among the NTFPs/ Agro products based cooperatives in
Tehrathum. The cooperative will explore opportunities for coordinated activities among
NTFPs/ Agro products based cooperatives in the marketing of paper these products and
managing the raw materials supply activities. The cooperative will closely work with
other firms in Tehrathum as well as nationally on issues relating to the NTFPs/essential
oils industry. It will join the associations of the herbs and herbal products producing
companies, firms and related other firms to explore opportunities in the herbs / essential
oil business.

5.5.5 Funding Institutions

The cooperative is expected to get support from Helvetas, Livelihood Forestry Program
(LFP), Community Support Program (CSP), District Development Committee Tehrathum
by funding and supporting various activities. The cooperative can get short term and long
term loans from Agriculture Development Bank and commercial banks when necessary.
It will maintain good relationships with funding institutions for the benefit of the
cooperative. The cooperative will further explore the funding assistantship in natural
resource conservation and supply aspects, marketing management, and technical
production aspects.

5.5.6 Assisting and Regulatory Institutions

Assisting and regulatory institutions like DFO, District Cottage and Small Scale
Industries Office (DCSIO), Nepal Chamber of Commerce (NCC), Federation of Nepal
Chamber of Commerce and Industries (FNCCI), and Trade Promotion Center (TPC)
provides various services to the cooperative for promotion of its business and regulating
its activities as per the government rules and regulations. The cooperative will coordinate
and cooperate in its business and services activities to get support from these institutions.
The cooperative will coordinate its activities with DFO for obtaining the forest products;
with DCSIO for conducting training and obtaining government facilities; and with NCC,
FNCCI, and TPC for various services including market information. The cooperative will
get the services of various agencies like transport and advertising in its business
activities.

18
6. RISK ANALYSIS AND MITIGATION STRATEGIES
6.1 Raw Materials
There is a possibility of increase in the price of raw materials. If price increase, it can go
up gradually. Collection of raw materials used for extraction of essential oils is a simple
process and they are found near by settlements. So, dramatic increase in the price is
unlikely.
Whereas, the resource is large enough, the supply of the raw materials will not be a
problem for this cooperative. Since the suppliers or collectors of raw materials are
involved in the ownership and management of this cooperative, the other unit if enter will
not pose a threat and will not create shortages of raw materials for this unit. To ensure the
sustainable supply of required raw materials, the cooperative will provide harvesting
training to the collectors. The NTFPs management system will be applied in community
forests and a raw materials sourcing plan also be introduced. Moreover, the rotational
system of harvesting will be practiced. Test plots on various harvest regiments will be
conducted and collectors will harvest in groups at agreed upon times in keeping with
forest operational plans. Furthermore, the forest user groups/farmers are motivated and
encouraged for the cultivation of Titepati and Bojho in the community forest lands as
well as in the marginal/swampy waste lands.
The quality of raw materials could be the problem for the cooperative if the collectors are
not well convinced to supply high grade materials. The cooperative will pay different
rates for different grades of raw materials in order to provide incentives to the collectors
to supply the best materials possible to the unit.
The cost of raw materials collection, transportation, and storage may slightly increase, if
the community of Ambung VDC cannot feed the cooperative. To solve this problem, the
cooperative will try to buy the materials at the unit site. When it has to buy from the
collection communities, it can use the existing trade channel of other NTFPs and can give
the responsibility of collection of raw materials to commission agents or send its
employee to procure the raw materials from the communities.
The cooperative will negotiate with the forest user groups and district forest office for the
sustainable supply of the raw materials.

6.2 Fuel/Energy
Firewood is a major source of fuel for the essential oil extraction unit. It is supplied from
the private forest and the community forest nearby according to the management plan of
the forest.
There can be a problem in firewood supply, if no control measures are applied. To
mitigate this problem, the cooperative will coordinate with local communities and forest
user groups and work to prepare a management plan for firewood production.

6.3 Sales
There is a good market for essential oils in Kathmandu from where most of them are
exported to international markets. There can be the decrease of sales volume, selling
price and increase of selling expenses, if the cooperative experiences intense competition
among other producers. Moreover, Ginger oil and Amomum oil will be the new
introduction to the market. Therefore, the cooperative has to bear the risk, if fails to
market in the initial stage.

19
But with the established market, and demand far outweighing supply, sales volume is not
likely to decrease. Selling price and cost of selling price however could change. The
cooperative will produce consistent quality products and improve its products according
to the demand of the market. It will also diversify its target market to ensure strong sales
over the long run.

6.4 Manpower
Extraction of essential oils from steam distillation process entertains simple technology.
Once the manpower is trained, there is low probability of experiencing manpower
shortages. Most of the employees will be from the local area. They will be trained on
extraction of essential oils adopting steam distillation method before production begins.
However, regular training will be arranged to uplift skills for those who require such
training. For the initial stage, if no local experts in oil extraction are available in the area,
such technicians will be hired from outside.

6.5 Policies, Rules and Regulation

Nepal has experienced frequent changes in policies, rules and regulations in many of its
sectors. In particular, essential oil production enterprises have received high priority from
the government of Nepal and the community forestry program has been highly
appreciated. Thus, this processing unit is less susceptible to any adverse effects of policy
change in Nepal.
If the government restricts the collection of raw materials (Titepati, Bojho and firewood)
from the community forest and does not provide license for collection of raw materials
and firewood from national forest, the unit cannot operate. Also, the cooperative is highly
depended on the export market of western countries. If these countries or Nepal itself
changes the policy unfavorable to export marketing, the cooperative will be adversely
affected. For such situation, the essential oil enterprises will have to apply pressure to
develop a more favorable environment for the entire enterprise.

6.6 Competition and Market Share

Although there are several essential oil (Artemisia oil and Calamus oil) processing
enterprises in Nepal, there is not intense competition in this market because of the high
demand for these oils. Industry demand continues to grow at a fast pace which further
increases the gap between demand and supply. Supply of raw materials from the forest,
on the other hand, is limited and it has increased competition among the producers in
securing sustainable raw material supply. There is a medium risk of new entrants to this
unit in the region. However, in a few years, there may be two or more essential oils
distillation unit established in Tehrathum. As a result, the supply of raw materials may
deteriorate, and increases in wages, raw material prices and other costs can occur. These
changes could harm the profitability of the cooperative and the status of the resource
base. If several entrepreneurs enter into the essential oil enterprise and increase the
production of oils in substantial quantities, it can potentially drop down the existing price
of the product in the domestic market as well as abroad.
The buyers are always in better position to influence any enterprise activities for such non
basic products. Since there is overwhelming preference for this product against other
synthetic products, it has a good position in negotiating deals.

20
Its eco-friendly and socially equitable marketing approach will also stimulate and
strengthen business transactions in the targeted niche markets to allow better comparative
advantages for the cooperative.
The cooperative will sell the products to Kathmandu based exporters, wholesalers, and
manufacturers of essential oils at the beginning. The export market will be explored later.
This is a community initiated cooperative. The cooperative does not intend to increase its
market share substantially because the supply side of raw materials limits it. The
cooperative will also have low shares of the total market because it is concentrating on a
market niche. One of the main advantages of targeting a niche market is the potential for
high profits. The cooperative knows the target customers well that it meets their needs
better. To save its market share the cooperative aims at providing consistent quality
products in a socially equitable and environmentally friendly way in order to attract
socially concerned customers.

6.7 Quality Control

There is a risk of lack of quality control. The raw materials quality can degrade with the
over harvesting activities which in turn, decreases the quality level of its products. The
quality control of the finished products also depends on the operation activities the unit.
The skill of the unit workforce can influence the quality level of essential oils. There is a
high risk of inconsistency in supply of quality raw materials and production of high
quality products. Once the products lose quality consistency, the market will hardly offer
the good price. Moreover, any improvement in quality of products, service can take long
tile to improve its image in the market.
So, the cooperative will try to control its quality of products and service. It will
differentiate the price rate for different qualities of raw materials and offer good prices
and other services for high quality materials. The production process will be regulated
and systematized to produce consistency in essential oil production. The final products
will be checked and proper measures will be devised. It will also improve its service
quality to raw material suppliers and target customers, or its stakeholders.

7. FINANCIAL ASSUMPTION AND MANAGEMENT

For the planning process, below is given the financial assumption and analysis of this
processing unit. The management of various assets and capital is also discussed below.
Per unit cost of various products and services in this analysis has been kept stable for the
entire projection period, as well as revenue. It has been assumed that the cost of per unit
inputs and revenue of per unit kg oils will move along the same curve. If there exists any
variation in expenditures and revenue while the actual operation advances, the financial
analysis and management measures will be adjusted accordingly to facilitate the
implementation and control of the financial matter.

7.1 Total Capital and Its Sources

7.1.1 Capital Requirement
Total capitalization of this cooperative is estimated to be Rs 2,797,400/-. This amount
includes the total fixed capital, total pre operating expenses and required initial working
capital. The initial required working capital has been estimated based on sales turnover
over three months, raw material stocks to be maintained for up to four months, and

21
provisions indefinitely. The assumptions and conditions applied in calculating working
capital are presented as follows:

b. Estimation of Working Capital Requirement

At the initial 50%, the operating expenses will be Rs 1,000,000/-. At 100% capacity, Rs
2, 000,000/- as working capital has been estimated.

b. Fixed Capital
Total fixed capital for this cooperative is estimated to be total Rs 1,797,400/- including
fixed assets and Rs 47,500/- for pre operating expenses.

1. Fixed Assets
It has been estimated that Rs 124,000/- will be required for land and improvement, Rs
644,800/- for building, Rs 977,100/- for machinery and equipments, Rs 30,000/- for
accessories and furniture, and Rs 21,500/- for other infrastructure like water tank,
fencing, stove and so on.

2. Pre-operating
The total Rs 47,500/- has been estimated for pre operating expenses. This includes the
cost for registration of cooperative, installment of machinery and tools, initial short
training, and trial process etc.

7.1.2 Sources
The cooperative management board and the local communities of the area will manage
and invest its resources and cash equivalent to 25 % of total capital requirement and
bilateral development agencies working in the field of natural resource management will
be requested to invest 75 %. At the initial stage, there will be no short term and long-term
loans in the capital structure. However, the cooperative can mix the loan in its capital mix
in the course of operation if any financial needs arise or any external source of capital
sounds easy to access and profitable to the cooperative. The cooperative can take a short-
term loan for working capital and long-term loans for fixed capital from commercial
banks and the Agricultural Development Bank.

7.2 Fixed Assets Management

The cooperative owns the land of 5-13-0-0 for its operation.
Boiler, vessels, condenser, receiver, and steam pipeline with valve are the machinery and
tools the unit will use. The machinery and tools will be purchased from Indian market or
Nepalese market as per the lowest quotation offer to the cooperative. The estimated total
cost of machinery and tools amounts to be Rs 942,100/- and Rs 35,000/- has been
allocated contingency for the machinery and tools. The transportation cost of the
machinery and tools to the processing unit site approx amounts to Rs 15,000/-. The
cooperative will own the furniture worth Rs 20,000/-. The cooperative will have to invest
Rs 16,300/- for purchasing 2 weighing balance and Rs 8,000/- for accessories like
hammers, buckets and mugs. The cooperative needs Rs 40,000/- for the containers. The
cooperative will prepare other infrastructure like water tank, stoves, weighing place etc.
with the amount of Rs 21,500/-The cooperative estimates the life of the building to be 12

22
years, machinery and tools to be 10 years, furniture 5 years, weighing balance 5 years,
containers 2 years, other accessories 2 years and other infrastructures 4 years.
The total depreciation is estimated in strait in straight-line methods and it accounts Rs
163,290/- per year. The maintenance of the building, machinery and equipments, and
other infrastructure is a regular activity for the longevity of these assets.

7.3 Fixed Costs

The cooperative will spend Rs 32,000/- on replacement and maintenance of equipment
and other materials, office supplies, marketing, and fixed manpower. The cooperative
will have to spend Rs. 10,000/- for office supplies, Rs 20,000/- for marketing, and Rs
2,000/- for auditing of its account. Beside these, the cooperative will invest Rs 276,000/-
on fixed manpower. An amount Rs 163,290/- has been estimated to be annual
depreciation and Rs 14,750/- to be annual amortization for the first five years. The fixed
cost has been held stable over the capacity utilization by the cooperative from 50% at the
initial year to 100% after the sixth year of production.

7.4 Variable Costs

The variable costs have been given at 50% rated capacity. The amount of Rs. 65,000/-
will be invested in variable costs at full capacity of the processing unit.

a. Raw Materials and its Inventory

The cooperative consumes total 75,000 kg of Titepati, 15,000 kg of Bojho, 15,000 kg of
Aduwa, and 1000 kg of Alaichi per year; at the rate of 1,250 kg per day in a total of 60
working days a year for Titepati, at the rate of 250 kg per day in a total of 60 working
days a year for Bojho, at the rate of 250 kg per day in a total of 60 working days a year
for Aduwa and at the rate of 20 kg per day in a total of 50 working days a year for
Alaichi. The cooperative will provide Rs.2/kg for Titepati collector, Rs.10/kg for Bojho
collector, Rs 20/kg for Aduwa and Rs 150/kg for Alaichi. Thus, it needs Rs 755,000/-
including transportation for the raw materials in a year.

b. Energy Expenses
Main source of energy is firewood. It is used for steaming raw materials while
processing. The cooperative will consume 373 kg of firewood per day. In total operation
of 230 days in a year, it needs 85,790 kg of firewood for its annual operation. Total
firewood cost is estimated to be Rs 64,400/- for a year including royalties.

c. Supporting Materials
The cooperative needs packaging and labeling materials. Epoxy coated metal containers
will be used as packaging materials. The capacity ranges from 5kg, 10kg, 20kg, 25kg,
50kg which will cost a total of Rs 30,000/-. Also the cooperative will use HDPE
containers with capacity of 20kg and 30kg, the cost of which is expected to be Rs
10,000/-. The total of Rs 42,250/- is estimated to be spent for purchasing packaging
materials including the cost for transportation and the travel cost for the procurement.

23
d. Manpower and Selling Expenses
The cooperative employs 7 direct workers for its operation. The technicians work for a
full year. On the other hand, the labors are employed for only 8 months a year. The
cooperative invests Rs 276,000/- for the remuneration for the workforces working
directly in the production of essential oils.
The cooperative has planned to sell its products in Kathmandu. The production of
Artemisia oil in a year will be 250 kg, Calamus oil will be 150 kg, Ginger oil will be 50
kg and Amomum oil will be 100 kg. The estimated direct selling expenses for one kg of
each oil is Rs 2,300/-, Rs 1,700/-, Rs 11,000/- and Rs 2,000/- respectively, including the
travel expenses of sales person.
The cooperative will manage the delivery of the oils to Kathmandu according to the
volume of oil.

7.5 Sales Projection

The cooperative will produce 500 kg of Artemisia oil, 300 kg of Calamus oil, 100 kg of
Ginger oil and 200 kg of Amomum oil a year at 100% production. In the initial year,
there is a chance that the cooperative will produce medium quality products. As a result,
the financial analysis of the project has been made with the sales revenue of medium
quality product price over whole projection period. With the medium price rate of Rs
575,000/- for Artemisia oil, Rs 255,000/- for Calamus oil, Rs 550,000/-for Ginger oil and
Rs 200,000/- for Amomum oil, the estimated annual sales revenue will be Rs 1,580,000/-
in the first year.

7.6 Income Statement

The income statement has been prepared for ten years. While preparing this statement,
the increment in cost to selling price has kept stable because there is equal chance of
costs and revenues increasing to less effect profit and loss. The income statement given in
the annex 10 has been prepared with the medium estimation of selling price of its
products. The income tax has not been calculated because the essential oil processing
enterprise entertains the income tax holidays up to 5 years. The royalty of raw materials
and firewood is levied on each unit of these products, so it has been considered as
variable cost for financial analysis. This statement figures the net profit of Rs 162,210/-in
the first year and Rs 324,420/- after sixth year.

7.7 Cash Flow Statement

The cash flow statement reveals that the cooperative inflows total Rs 2,580,000/- and out
flows Rs 1,844,900/- in the first year of operation.

7.8 Balance Sheet

The balance sheet reveals that the total capitalization of the project will be met with the
long-term liability of shareholders' equity.

7.9 Financial Analysis

™ Pay Back Period (PBP)
The pay back period of this project is 8.11years.

24
™ Break Even Point (BEP)
Break even point is 6.67 kg of Artemisia oil, 4.00 kg of Calamus oil, 1.33 kg of Ginger
oil and 2.08 kg of Amomum oil in sales unit, with Rs 12,269.3 for Artemesia oil, Rs
5,441.27 for Calamus oil, Rs 11,736.07 for Ginger oil and Rs 4,267.66 for Amomum oil
in sales amount at the initial year.

™ Return on Investment (ROI)

The return on investment is 9.02 % of the total capital investment on this cooperative at
initial 50% capacity.

™ Net Present Value (NPV)

Net present value of the cooperative will be Rs (890,997.24) positive over ten year's
period at 20 % discount rate.

™ Profitability Index (PI)

The profitability index of this project is 0.52 based on total present value over ten years at
20% discount rate.

Sensitivity Analysis
For NPV and PI, net cash flow of ten year has been taken into account. BEP has based on
the costs, and selling prices and ROI has based on the capital investment of Rs
1,000,000/- and net incomes at initial 50% capital utilization on following condition.

Condition PBP (year) BEP (kg) BEP ROI NPV (At PI

(Rs) (%) 20%)
Original assumption 8.11 11.62 33363.03 9.02 (890997.24) 0.52
Decrease of selling price 23.98 14.68 33714.53 -1.5 (864383.25) 0.53
of oils by 20%
Increase of raw materials 13.47 11.62 33363.03 3.98 (1270837) 0.31
buying cost by 20%
Increase of all inputs costs 9.69 11.62 33363.03 7.52 (1250477.25) 0.43
by 20%
Decrease selling price by 8.9 14.68 33714.53 8.20 (1304678.75) 0.36
20% and increase all
inputs costs by 10%
Decrease selling price by 11.79 12.97 55700.88 5.38 (1304678.75) 0.36
10% and increase all
inputs costs by 10%
Note: Costs of all inputs includes all operating cost including fixed cost but
excluding depreciation.

8. PLAN OF OPERATION
The operational plan acts as a guideline for the cooperative development activities. The
arrangement of time line, responsibility assignment, methods, and support had been

25
clearly identified. This processing unit development plan is a joint effort of local
communities, forest user groups, district forest office, district cottage and small scale
industry office, and other stakeholders.
Registration of the cooperative has been completed. Preparation of water management
system, other infrastructure, construction of building, purchasing of machinery and tools
has to be done at the earliest possible period. These activities will be assigned to the
management board. Procurement of raw materials, firewood, and other necessary goods
will be done before the production starts. The production of essential oils will begin by
November, 2005.

9. CONCLUSION
The ecological, financial, technological and social analysis of this project clearly
indicates that the project is highly feasible and sustainable. Medium investment in fixed
assets, high cash inflows to the communities, high income and employment generation,
use of simple technology and sustainable supply of raw materials from the local source,
and participation of local communities in management and ownership of the cooperative
have enabled the sustainability of this cooperative. With the high return on investment,
short pay back period, low percentage of break even point, high rate of internal rate of
return and profitability index, high positive net present value, and high liquidity ratios,
this cooperative is financially profitable and viable in the short as well as long run.
This project has low risk from raw material sourcing to marketing aspects. This project
will make positive impact on resource conservation and social, technological and
economic development in the society.
While implementing this project, separate detailed resource conservation and
management plan, marketing plan, technical production plan, and monitoring plan will be
devised to strengthen this project for better benefits to the shareholders and customers of
this cooperative and to the whole society in the long run.

26