MET 445 RENEWABLE ENERGY ENGINEERING

MODULE 5
Bio Mass Energy- Biomass conversion technologies –Bio Gasification, Bio
ethanol, BioDiesel, Biogas production from waste biomass, factors affecting biogas
generation Bio Gas-KVIC and Janata model, Hydrogen Energy – various routes for
production of Hydrogen energy
Economic Analysis – Initial and annual cost, basic definitions, present worth
calculations, repayment of loan in equal annual instalments, annual savings,
cumulative saving and lifecycle cost, economic analysis of add on solar system,
payback period(derivation)
Course Outcome 6 (CO6):
1. Distinguish between Fixed dome plant and floating dome type biomass plant.
2. Write a short note on solar saving.
3. Derive expression for payback period
 Introduction
• Biomass is an organic renewable energy.
• It is mostly produced from agriculture and forest products and residues, energy
crops, and algae.
• Organic component of municipal and industrial wastes and the fuel produced from
food processing waste such as used cooking oil are also considered biomass.
• Before coal, oil and natural gas replaced it as primary fuels, wood was the primary
fuel for
• space heating in winter.
• Crops and forest products are usually converted to liquid and gaseous fuels through
some engineering processes.
• Growing of crops and trees as well as the conversion to liquid and gaseous fuels
involves the consumption of energy in the form of electricity and fossil fuels such as
coal, oil, and natural gas.
• The consumption of fossil fuels is accompanied by the pollutant and greenhouse
emissions.
• Renewability and emission characteristics of biomass are not as good as other
renewables such as solar, geothermal, or wind.
 Biomass Resources
Biomass can be obtained from variety of resources called feedstock. Biomass resources can be listed as
follows (DOE/EERE, 2018):
• Dedicated Energy Crops These herbaceous energy crops are perennials that are harvested after reaching
maturity. These include such grasses as switchgrass, miscanthus, bamboo, sweet sorghum, tall fescue,
kochia, wheatgrass, and others.
• Agricultural Crops These include cornstarch and corn oil, soybean oil and meal, wheat starch, and
vegetable oils. They generally yield sugars, oils, and extractives.
• Agriculture Crop Residues Biomass materials consisting primarily of stalks and leaves not used for
commercial use such as corn stover (stalks, leaves, husks, and cobs), wheat straw, and rice straw are
included in this resource. Approximately, 80 million acres of corn is planted annually.
• Forestry Residues These are biomass not harvested or used in commercial forest processes including
materials from dead and dying trees.
• Aquatic Crops Aquatic biomass resources include algae, giant kelp, other seaweed, and marine microflora.
• Biomass Processing Residues By-products and waste streams produced by biomass processing are
called residues, and they represent an additional biomass resource.
• Municipal Waste Plant-based organic material generated from industrial, residential, and commercial
waste represents an important biomass source. Some examples include waste paper, wood waste, yard
waste, and cooking oil.
• Animal Waste Animal wastes consist of organic materials and are generated from farms and animal-
processing operations. Animal waste is used as a heating fuel in some parts of the world.
 Biomass based fuels

Biomass

Solid Liquid Gases

• Ethanol
• Wood • Methane
• Methanol
• Agricultural residue • Syngas
• Organic oil

• Solid biomass are highly dispersed and bulky and contain large quantity of water (50-90%)
• Low calorific value
• Not economical to transport
• Conversion to useable energy should be done at the source
• Conversion to liquid and gaseous form improves transportability and energy density
Biomass based fuels
 Conversion of biomass to fuel
Biomass can be converted into liquid or gaseous fuels through biochemical- and thermochemical-
based conversion processes.
 Conversion of biomass to fuel
• Thermochemical conversion processes, heat energy and chemical catalysts are used to
break down biomass into intermediate compounds or products.
• In gasification, biomass is heated in an oxygen-starved environment to produce a gas
composed primarily of hydrogen (H2) and carbon monoxide (CO).
• In pyrolysis, biomass is exposed to high temperatures without the presence of air, causing it to
decompose. Solvents, acids, and bases can be used to fractionate biomass into an array of
products including sugars, cellulosic fibres, and lignin

• Biochemical conversion processes, enzymes and microorganisms are used as biocatalysts

to convert biomass or biomass-derived compounds into desirable products (Anaerobic
digestion).
• Cellulose and hemicelluloses enzymes break down the carbohydrate fractions of biomass to
five- and six-carbon sugars in a process known as hydrolysis. Yeast and bacteria then ferment
the sugars into products such as ethanol.
• Chemical conversion processes Transesterification is defined as the process in which
triacylglycerides from a variety of feedstock such as nonedible oil seeds, vegetable oils, animal
fats or tallow, waste cooking oil, and microbial lipids or single cell oil (from algae, oleaginous
yeast, filamentous fungi and bacteria) are converted into fatty acid methyl esters (biodiesel)
in the presence of alcohol (methanol or ethanol).
 Thermochemical conversion processes
• The basic thermo-chemical process to convert biomass into more valuable and/or convenient
product is known as pyrolysis. Biomass is heated either in absence of oxygen or by partial
combustion of some of the biomass in restricted air or oxygen supply.
• Pyrolysis can process all forms of organic materials including rubber and plastics, which cannot
be handled by other methods. The products are three types of fuels, usually: a gas mixture (H2,
CO, CO2, CH4 and N2), oil like liquid (water soluble phase including acetic acid, acetone, methanol
and non-aqueous phase including oil and tar) and a nearly pure carbon char.
• The distribution of these products depends upon the type of feedstock, the temperature and
pressure during the process and its duration and the heating rate.
• High temperature pyrolysis (~1000 °C) maximizes the gaseous product.
• The process is known as gasifcation.
• Low temperature pyrolysis (up to 600 °C) maximizes the char output (carbonization).
• The process has been used for centuries for production of charcoal.
• Liquid product is obtained through catalytic liquefaction process.
• Liquefaction is a relatively low temperature (250–450 °C), high pressure (270 atm) thermo-
chemical conversion of wet biomass, usually with high hydrogen partial pressure and also a
catalyst to enhance the rate of reaction and/or to improve the selectivity of the process.
 Biochemical conversion process
The process makes use of metabolic action of microbial organism on biomass to produce liquid and
gaseous fuel. Two major biochemical processes are explained below:
(a)Ethanol Fermentation
Alcoholic Fermentation is the decomposition in absence of air of simple hexose sugars (sugars
containing six carbon atoms per molecule, i.e. C6H12O6) in aqueous solution by action of enzyme (a
natural catalyst) present in yeast, in acidic conditions (pH value 4 to 5)

(b) Anaerobic Fermentation (Anaerobic Digestion)

This process converts decaying wet biomass and animal wastes into biogas through decomposition
process by the action of anaerobic bacteria (bacteria that live and grow in absence of oxygen).
Carbon present in biomass may be ultimately divided between fully oxidized CO2 and fully reduced
CH4. Thus:
 Biochemical conversion process
• The biomass material in the form of water slurry is digested by the bacteria anaerobically for
several days in an airtight container.
• The reactions are slightly exothermic and small amount of heat (equivalent to 1.5 MJ per kg dry
digestible material) is also generated that helps in maintaining favorable temperature.
• The process may be expedited at somewhat higher temperature.
• The most useful biomass materials appear to be animal manure, algae, kelp, hyacinth, plant
residues and other organic waste materials with high moisture content.
 Biomass Gasification
• The word gasifcation (or thermal gasifcation) implies converting solid fuel into a gaseous fuel by
thermo-chemical method without leaving any solid carbonaceous residue.
• Gasifer is the equipment that converts biomass into producer gas.
• Most common raw materials are: wood chips and other wastes from wood industry, coconut
shells, straw etc.
• Biomass that has high ash content such as rice husk etc. can also be handled though with some
difficulty.
• Gasifcation involves partial combustion (oxidation in restricted quantity of air/oxidant) and
reduction operations of biomass.
• In a typical combustion process generally oxygen is surplus, while in gasifcation process fuel is
surplus.
• The combustion products, mainly carbon dioxide, water vapour, nitrogen, carbon monoxide and
hydrogen pass through the glowing layer of charcoal for the reduction process to occur.
• During this stage both carbon dioxide and water vapour, oxidize the char to form CO, H2 and CH4.
• Following are the typical reactions, which occur during gasifcation:
 Biomass Gasification

• The moisture available in the biomass is converted to steam and generally no extra moisture is
required.
• Thus the product of combustion of pyrolysis gases results in CO2 and H2O (steam), which further
react with char:
 Biomass to Ethanol Production

• Ethanol is manufactured by action of

microorganisms on carbohydrates. The process is
known as alcoholic fermentation.
• Carbohydrates (also known as saccharides) can
be divided into three major classes in order of
increasing complexity.
• Monosaccharides - simple hydrocarbons, which
cannot be hydrolysed into simpler compounds
(glucose, fructose),
• Oligosaccharides - yield few but definite
numbers (2–10) of monosaccharide molecules on
hydrolysis (sucrose, maltose),
• Polysaccharides - high molecular mass
carbohydrates, which yield large number of
monosaccharides molecules on hydrolysis
(starch and cellulose)
 Biomass to Ethanol Production

The hexose (glucose and/or fructose) required for ethanol fermentation is derived from: (a) sucrose
(b) starch or (c) cellulose.

(a) Preparation from sucrose

Commercial sucrose is removed from the cane juice, and the remaining molasses, which has low
commercial value, is used for ethanol production.
The molasses itself has about 55 per cent sugar content and serves as very good raw material for
ethanol production.
On hydrolysis with dilute acids or enzyme it gives equal amounts of glucose and fructose.

(b) Preparation from starch

On hydrolysis with dilute H2SO4 or enzyme, starch breaks down to maltose and finally to glucose.
 Biomass to Ethanol Production
(c) Preparation from cellulose
Cellulose is not hydrolyzed so easily as starch, but on heating with dilute sulphuric acid under
pressure yield glucose (i.e. at 393K and pressure (2–3 atm).

• Sucrose materials are readily available in fermentable form, require least expensive preparation,
but are generally most expensive to obtain.
• Starch bearing materials are often cheaper, but require processing to solubilize and convert starch
to sugars.
• Cellulosic materials are the most readily available raw materials, as cellulose is the most
abundantly available organic compound in the world, but they require the most extensive and
costly preparation

Ethanol is obtained from fermentation of hexose sugars

 Biodiesel
• Biodiesel is ethyl or methyl ester that is produced through a process that combines organically
derived oils with ethanol or methanol in the presence of a catalyst.
• Common sources of biodiesel include new and used vegetable oils, animal fats, and recycled
restaurant greases.
• The Higher Heaating Value (HHV) of biodiesel is about 40,700 kJ/kg (17,500 Btu/lbm), which is
about 12 percent less than that of petroleum diesel (HHV = 46,100 kJ/kg).
• Biodiesel can be used in compression ignition engines as a single fuel or can be added to
conventional diesel fuel.
• The most common biodiesel mixture used in the United States is B20, which is 20 percent
biodiesel and 80 percent conventional diesel.
• Biodiesel is also used as a single fuel in compression ignition engines, called B100.
• Whereas B20 can be used in a diesel engine without any modification, B100 usually requires the
use of special material for parts such as hoses and gaskets.
• Due to Lower Heating Values, B100 provides less power from the engine.
• Some maintenance issues can also arise and some manufacturers may not cover biodiesel use in
their warranties.
• B100 could increase nitrogen oxides emissions while significantly reducing hydrocarbon, sulfur,
and carbon monoxide emissions.
 Biogas production from waste biomass
• Biomass, if left to decompose in open air, is acted upon by aerobic bacteria (bacteria that require
oxygen for their survival and growth) to produce mainly CO2, NH3, etc.
• Total carbon component completely get oxidized to produce CO2 and no fuel is produced. Some
part of nitrogen is also lost in the form of ammonia

• Biogas is produced from wet biomass with about 90–95 per cent water content by the action of
anaerobic bacteria (bacteria that live and grow in absence of oxygen).
• Part of carbon is oxidized and another part reduced to produce CO2 and CH4.
• These bacteria live and grow without oxygen.
• They derive the needed oxygen by decomposing the biomass.
• The process is favored by wet, warm and dark conditions.
• The airtight equipment used for conversion is known as biogas plant or digester, which is
constructed and controlled to favor methane production.
• The conversion process is known as anaerobic fermentation (or biodigestion).
• Nutrients such as soluble nitrogen compounds remain available in solution and provide excellent
• fertilizer and humus.
• The energy available from the combustion of biogas is 60–90% of the input dry matter heat of
combustion. Thus the energy conversion efciency of the process is 60–90 per cent.
 Stages in Biogas production

Stage I: First of all the original organic matter containing complex compounds e.g.
carbohydrate, protein, fats etc. is broken through the influence of water (known as
hydrolysis) to simple water soluble compounds. The polymers (large molecules)
are reduced to monomers (basic molecules). The process takes about a day at 25
°C in an active digester.
Stage II: The micro-organisms of anaerobic and facultative (that can live and grow
with or without oxygen) groups, together known as acid formers produce mainly
acetic and propionic acids. Tis stage also takes about one day at 25 °C. Much of
CO2 is released in this stage.
Stage III: Anaerobic bacteria, also known as methane formers slowly digest the
products available from second stage to produce methane, carbon dioxide, small
amount of hydrogen and trace amount of other gases. The process takes about
two weeks’ time to complete at 25 °C. This third stage, i.e. methane formation
stage is carried out strictly by the action of anaerobic bacteria.
 Floating Drum (Constant Pressure) Type Biogas Plants
• Numerous models of floating drum type biogas plants
are developed in various countries. Most
representative of this type is the KVIC model (Khadi
Village Industries Commission), developed in India,
shown in Fig.
• It has an inverted mild steel drum to work as
gasholder. This is the most expensive component of
the plant.
• The drum floats either direct on fermentation slurry
or in a water jacket of its own.
• Most Indian plants now have a pair of central guide
pipes.
• The gasholder is free to rise or fall depending on the
production and use of gas.
• It is also free to rotate on its axis which will also be
useful as a device to break the scum in the digester.
 Floating Drum (Constant Pressure) Type Biogas Plants

• A flexible hosepipe is attached at the top of the gasholder for gas dispersion.
• The gas passes through a moisture trap before supplying to the utility/house.
• The digester is a deep circular pit or a well, built of bricks, mortar and plaster,
with a partition wall.
• The bifurcation of digestion chamber through partitioning wall provides
optimum conditions for growth of acid formers and methane formers as the
requirement of pH values for these bacteria are different.
• Therefore, this plant operates very well with good biogas yield.
• The underground structure helps minimize the heat loss from the plant and the
cylindrical shape has better structural strength.
 Fixed Dome (Constant Volume) Type Biogas Plants
Janata Model

• This plant is more economical as only masonry work is

required.
• Gas pressure in the dome varies depending on the
production/consumption rate.
• By construction a dome structure is very strong for
outside pressures but a weak one for inner pressures.
• As gas pressure is exerted from inside out, the dome
structure may fail if proper care is not taken in its
construction.
• The dome is constructed underground to maintain
pressure over it.
• Skilled masonry workmanship is required for
construction of dome.
• In case of any leakages/cracks the plant may fail.
• A typical family size Chinese model (Janata Model) is
shown in Fig.
 Fixed Dome (Constant Volume) Type Biogas Plants

• Many variations of this basic design are developed to reduce the cost by making use of
different materials to suit local conditions.
• The slurry enters from inlet and the digested slurry is collected in a displacement
tank.
• Stirring is required if raw material is crop residue.
• There is no bifurcation in the digester chamber and therefore the gas production is
somewhat less as compared to floating point design.
• The gas produced is stored in the dome and displaces the liquids in inlet and outlet,
often leading to gas pressure as high as 100 cm of water.
• The gas occupies about 10 per cent of the volume of the digester.
• As complete plant is constructed underground, the temperature tends to remain
constant and is often considerably higher than ambient temperature in winter.
 Comparison of Floating Drum and Fixed Dome Type Plants
S No. Feature Floating drum Fixed dome
1. Cost More (due to steel drum) Less

2. Corrosion Yes (likely in steel drum) No

More Less
3. Maintenance (i) drum requires painting, once or twice a year (i) no steel part is used.
(ii) flexible gas pipe requires replacement (ii) gas pipe is a fixed G.I. pipe.
Good (temperature will be constant due to
4. Thermal Insulation Bad (heat loss due to steel drum)
complete underground construction)
5. Scum troubles Less likely (as solids are constantly submerged) More likely
Gas production per unit volume of High (due to bifurcation, both acid and methane formers
6. Low
digester find better environment for growth)
7. Scum braking By rotation of drum (no stirrer required) External stirrer is required

8. Leakage Less likely More likely

Danger of mixing with oxygen due to
9. No More likely
leakage/cracks
10. Gas pressure Constant Variable

11. Masonry workmanship Average skill Specialized, skilled masonry work required

12. Repairing of defects in gas holder Easy Difficult

Can process dung and night soil slurry. Other organic It can be easily adapted/modified for use of
13. Choice of feed material
materials can clog the inlet pipe other materials along with dung slurry
 Hydrogen Energy

• Hydrogen holds the potential to provide

clean, reliable and affordable energy
supply that can enhance economy,
environment and security.
• It is flexible and can be used by all
sectors of economy.
• It is non-toxic and recyclable.
• Due to these qualities it is considered to
be an ideal energy carrier in the
foreseeable future.
• Hydrogen can be produced by using a variety of energy sources, such as solar, nuclear and
fossil fuels and can be converted to useful energy forms efficiently and without
detrimental environmental effects.
• When burned as fuel or converted to electricity it joins with oxygen to produce energy
with water as the only emission
 Hydrogen Energy
Drawbacks
• Hydrogen has no existing, large scale supporting infrastructure.
• Building of such an infrastructure will require major investment.
• Although hydrogen production, storage and delivery techniques are currently in
commercial use by the chemical and refining industries, existing hydrogen storage and
conversion technologies are too costly for widespread use in energy applications.
Production

It can therefore, be produced through two routes:

1. Fossil fuels, such as natural gas, coal, methanol, gasoline etc., and biomass are
decomposed by thermo-chemical (steam reforming or partial oxidation) methods to
obtain hydrogen.
2. Hydrogen can also be produced by splitting water into hydrogen and oxygen by using
energy from nuclear or renewable sources such as solar, wind, geothermal, etc.,
through electrical or thermal means (i.e. electrolysis and thermolysis respectively).
Water splitting is also possible through biophotolysis process using solar radiation.
 Hydrogen Energy Production
1. Thermo-chemical Methods
• Steam reforming of methane is the most energy efficient, commercialized technology
currently available and most cost effective when applied to large, constant loads.
• The steam reforming method has been described in the previous section on fuel cell.
• Partial oxidation (thermal gasification) method of biomass has been described
previously
 Hydrogen Energy Production
2. Electrolysis of Water
• Electrolysis is the simplest method of hydrogen production.
• Not as efficient or cost effective as thermo-chemical method using fossil fuels or
biomass.
• But it would allow for more distributed hydrogen generation and open the
possibilities for use of electricity generated from renewable and nuclear resources
for hydrogen production

• An electrolysis cell essentially consists of two

electrodes, commonly flat metal or carbon plates,
immersed in an aqueous conducting solution
called electrolyte, as shown in Fig. 12.10.
• A direct current decomposes water into H2 and O2,
which are released at cathode (–ve electrode) and
anode (+ve electrode) respectively.
• As water itself is poor conductor of electricity, an
electrolyte, commonly aqueous KOH is used.
 Hydrogen Energy Production
• Ideally, a decomposition voltage of 1.23 V per cell should be sufficient at normal
temperature and pressure; however, due to various reasons a voltage of about 2 V per
cell is applied in practice.
• The energy required is 3.9–4.6 kWh per m3 of hydrogen produced.
• About 60–70 per cent of this energy is actually utilized in electrolysis.
• Therefore, the efficiency of electrolysis process is about 60–70 per cent, which can be
improved up to 80 per cent by using catalyst such as porous platinum or nickel.
• Electrolysis method is most suitable when primary energy is available as electrical
energy, e.g. solar photovoltaic energy.
• It is also suitable where cheap electricity is available from other sources such as wind,
geothermal, etc
 Hydrogen Energy Production
3. Thermolysis of Water
• Thermolysis is splitting water directly from heat energy
• More efficient than conversion of heat, first to electricity (using heat engine –
generator) and then producing hydrogen through electrolysis.
• Direct thermal decomposition of water is possible but it requires a temperature of at
least 2500 °C
• Sequential chemical reactions at substantially lower temperature can be devised to
split water into H2 and O2
• In the reaction series, water is taken up at one stage and H2 and O2 are produced in
different stages.
• The energy is supplied as heat at one or more stages and partly released at some stage
in the cycle.
 Hydrogen Energy Production
• Several thermo-chemical cycles have been proposed and are under investigation.
One such cycle is given below:

4. Biophotolysis
• In this method the ability of the plants (especially algae) to split water during
photosynthesis process is utilized.
• An artificial system is devised, which could produce hydrogen and oxygen from water
in sunlight using isolated photosynthetic membrane and other catalysts.
• Since this process is essentially a decomposition of water using photons in the presence
of biological catalysts, the reaction is called photolysis of water.
 Hydrogen Energy Production
• There are three distinct functional components coupled together in the system as
shown in Fig. 12.11:
• (i) photosynthetic membrane, which absorbs light, split water to generate oxygen,
electrons and protons,
• (ii) an electron mediator, which is reducible by photo-synthetically generated electrons
and
• (iii) a proton activator that will accept electrons from the reduced mediator and
catalyze the reaction: 2 H + + 2 e → H2.
 Economic analysis
Importance of Economic analysis in Renewable energy

• For all projects aiming at the production/consumption of energy it is necessary to

choose the most economic energy supply route for a given requirement.
• Large numbers of energy systems with their unique peculiar features are available
• The energy supply through solar energy system for example, is diurnal and
generally requires storage for its use, whereas wind energy is fluctuating and
intermittent and generally requires a grid connection to maintain steady supply.
• Systematic evaluation of their financial and economic aspects is essential
• Helps to optimize the allocation of funds by concentrating on those applications
which are financially/economically more rewarding besides being socially
acceptable and environmentally sustainable
• Failures can be avoided by proper understanding of the financial and economic
strengths/weaknesses of various available options
• Economic feasibility studies helps management make sound investment decisions for
capital projects in the private and public sectors with particular reference to
renewable energy systems.
 Basic Terms and Definitions
• Cash Flow Diagram
• Any organization usually has frequent receipts and
disbursements taking place over a particular interval of
time. These transactions can be shown on a cash flow
diagram.
• A cash flow diagram is simply a graphical representation of
cash flows drawn on time scale, as shown in Fig.
• The horizontal line represents the progression of time from
left to right.
• The time scale is divided into equal intervals, known as
interest periods.
• The numbers 1, 2, 3, · · ·, n, on time scale represent the end
of corresponding periods.
• Time “0” represent the starting date or present time.
• A vertical arrow pointing upwards indicates positive cash flow (cash receipt, income) and the arrow
pointing downwards indicate negative cash flow (disbursement, cost).
• At any point in time the net cash flow would be represented as: Net cash flow = receipts –
disbursements
• All cash flows occur at the end of interest period.
• This practice in engineering economics is known as end of period convention
 Basic Terms and Definitions
Principal Amount, P
• This is the amount of money that is being considered initially.
• It might be an amount to be invested or loaned or it may refer to initial value or cost of a plant or
machinery
Interest, I
• Interest is the payment (other than the sum borrowed) made for the money borrowed from the
bank or financer.
• Interest is the consideration which the money lender receives for the use of money lent.
Alternatively, interest may be regarded as the return obtained by the productive investment of
capital.
Interest Rate
• Interest rate is essentially a measure of productivity of money as a resource.
• Alternatively, interest rate is a measure of investor’s preference for the time value of money.
• Interest rates are also quoted for a period other than one year. However, unless otherwise stated,
it is customarily understood to be specified on annual (per annum) basis
Cost of Capital
• It is usually defined as the minimum rate of return that an investor (or company) expects to earn
on its investment
 Basic Terms and Definitions
Number of Time Periods, n
• The number of time intervals over which the amount of money is being invested or borrowed.
Although “n” is usually the number of years, it may represent other time periods such as number
of quarters or months.
 Kinds of Interest
Simple Interest
Simple interest is directly proportional to the capital involved, the number of
interest periods and the interest rate. The total interest, I on principal, P for n
number of interest periods at interest rate, i (expressed as fraction) is given by:
I = P*n* i

Compound Interest
When the simple interest is added to the principal amount so that the amount
becomes the principal amount for the next term (period), the interest so
obtained is called compound interest.
An amount, P invested at an annual interest rate of i compounded annually, after
n years becomes: F = P (1 + i) n
P is known as present value of the investment; i is the annual interest rate, n is number of interest
periods, and F is the future value of the investment
 Kinds of Interest

When the period of interest is less than one year, compound interest rates may be quoted in two
ways:

(a)Nominal Interest Rate

Nominal interest rate is the annual interest rate obtained simply by converting the interest rate
specified for one period (where the period is less than one year) to a year disregarding the effect of
compounding after each period. For example, an interest rate of 2% compounded each month for a
year is typically quoted as 24% (2 × 12) nominal interest rate or annual interest rate.

(b) Effective Interest Rate

It represents the actual or exact rate of interest upon the principal during a specified period.
The effective interest rate based on a year is referred to as the effective annual interest rate.
If i represents the nominal interest rate per year, and m the number of interest (compounding)
periods per year, the effective annual interest rate ie may be expressed as:
Kinds of Interest
 Calculations for the Case of Single Payment (Or Receipt)
Single Payment Compound Amount Factor or Future Value Factor
When an amount P is invested for n equal interest periods with i as interest rate,
the future value F of investment obtained according to Eq. is:

Present value P is an outlay and it is

represented by a downward arrow at time
zero “0”, while its future value F is an inflow
represented by an upward arrow.
 Calculations for the Case of Single Payment (Or Receipt)
Q. What will be the amount of Rs. 2000 invested at 12% interest compounded
annually at the end of 6 years?

Solution
Given,
P = 2000
i = 0.12
n=6
From Eq.,
F = 2000 (1 + 0.12)6
≈ Rs. 3948
 Calculations for the Case of Single Payment (Or Receipt)

Q. Find the number of years in which an investment of Rs. 10 lakh will double in
value, if the interest rate is 12.25%.

Solution
Given,
P = 10 lakh
F = 20 lakh
i = 0.1225
From Eq. (14.1),
20 = 10(1 + 0.1225)n
2 = (1 + 0.1225)n
log 2 = n log (1.1225)
n = log 2/log (1.1225)
n=6
 Single Payment Present Worth Factor
Single Payment Present Worth Factor
If the future value of an investment (or payment) is known, we can derive its present
value, given an interest rate and the number of compounding periods for P , giving

The expression in brackets, which is used to multiply F to obtain P, is called “single

payment present worth factor”
The process used in converting the future value to its present value is called
“discounting”.
In the above expression the present value is calculated by discounting the future value
of a given amount.
The term “i” is known as discount rate.
 Single Payment Present Worth Factor

Q. What is the present value of future payment of Rs 100,000 due 10 years from
now, if the nominal interest rate is 6%?

Solution
Given,
F = 100,000
i = 0.06
n = 10
 Uniform Series Compound Amount Factor
• Business firms and individual investors, in order to meet their future capital
investment requirements, set aside each year a certain amount of savings which over
time accumulate to an amount that, hopefully will meet their expected needs.
• In this case the investment process involves investing an amount A each year.
• At the end of nth year the principals plus the interest earned compounded annually
becomes F, the future value of the investment as shown in Fig.

The accumulated future amount F after n years may be calculated as:

• where A is the annual amount invested each

year and compounded annually to accumulate
F.
• The expression in the bracket is known as
“uniform series compound amount factor”
 Uniform Series Compound Amount Factor

Q. What will be the future amount of a uniform payment of Rs 500 deposited at the
end of each year with an interest rate of 9 per cent per annum, at the end of 6
years?

Solution
Given,
A = 500
i = 0.09
n=6
 Uniform Series Sinking Fund Factor
• When the future capital expenditure for a certain activity or project is known, the
required amount A to be invested annually at a given interest rate can be determined
from Eq

The expression in the bracket is known as “uniform series sinking fund factor”

Q. The replacement of the tubular battery of a solar PV system at the end of four years is
likely to cost Rs 12,000. What amount should a user deposit every year to accumulate the
desired amount if he earns 9 percent interest on his deposit?

Solution
Given,
F = 12,000
i = 0.09
n=4
 Uniform Series Present Worth Factor
• It is often required to know the present value P of a series of equal payments A (or
receipts) over a number of years n at a given rate of interest i.
• Such a series is shown in Fig.

The present worth P of a uniform series of cash

flow can be determined using following equation

The expression in the bracket is known as “uniform series present worth factor”
 Uniform Series Present Worth Factor
Q. In a major maintenance drive, replacing old machinery in a plant by more efficient one
can reduce energy consumption leading to saving of Rs 30,000 at the end of each year for
the next 8 years. Keeping the overall economy in mind, how much expenditure in the
maintenance may be allowed if the interest rate is 10%.
Solution
Given,
A = 30,000
n=8
i = 0.1
Present worth of overall savings due to enhanced efficiency after maintenance

Therefore, at the most the above amount may be spent on the replacement at present.
 Uniform Series Present Worth Factor
Q. A 100 liter per day domestic solar water heater saves consumption of electricity in an electric
geyser on 100 days of the year by heating 100 liters of water from 15 °C to 60 °C. The useful life of the
solar heater is estimated as 10 years. Determine the present worth of saving through the use of solar
water heater, if the efficiency of electric geyser is 90% and the cost of electricity is Rs 4 per kWh.
Assume interest rate as 12%.

Solution
Given,
n = 10
i = 0.12
Electricity saved by the solar water heater in one day:
 Uniform Series Present Worth Factor

Present worth of overall savings during its lifetime of 10 years may be calculated
from Eq.
 Uniform Series Capital Recovery Factor

In engineering economy studies, the present value of an investment is frequently known,

and what is to be found is the annual receipt (annuity) that will be generated in the future
over the life of the investment at a given rate of interest.

The expression in the bracket is known as “uniform series capital recovery factor”
 Uniform Series Capital Recovery Factor
Q. A 2-kWh PV roof top plant cost Rs 2, 00,000 and has a useful life of 25 years. The
annual average maintenance cost is 5% of the capital cost and the discount rate is 10%.
Calculate the unit cost of solar PV generated electricity if it supplies a load of 25% of its
power rating for 10 hours daily.
Solution
Given,
P = 2,00,000
n = 25
i = 0.1
 Uniform Gradient Series Of Payments (Or Receipts)
Sometimes an investment generates a uniform series of payments that either increase or decrease
by a constant amount as shown in Fig. Such a series is known as “uniform (or arithmetic) gradient
series” of payments.
To evaluate such a series, an equivalent “uniform series
of payments” with constant cash flows Ag is found and
then Pg or Fg is computed for this equivalent series. The
equivalent cash flows of uniform series of payments
may be obtained from

Where G is the constant amount of change or gradient

per period (which may be positive or negative), A1 is
the payment at the end of frst year and n is the
number of periods. (A/G, i, n) is known as “uniform
gradient annual series factor” or “gradient to uniform
series conversion factor” and is given by
 Uniform Gradient Series Of Payments (Or Receipts)
Q. A person wants to start a solar lantern manufacturing company and expects the sales revenues of
Rs 10 lakh at the end of first year. In subsequent 5 years, sales are expected to increase by Rs 1 lakh
annually. The manufacturer has applied for a loan of Rs 40 lakh from a bank to finance the project.
The bank’s policy requires that the loan must not exceed 85% of the expected revenues. If the
discount rate is 12%, will the manufacturer get the loan?

Solution
Given,
A1 = 10 lakh
G = 1 lakh
i = 0.12
n=5
The gradient to uniform series conversion factor from Eq. is given by:
 Uniform Gradient Series Of Payments (Or Receipts)

The equivalent cash flows of uniform series from Eq.:

Ag = 10 + 1 × 1.7745945
= 11.7745945 lakh

Present worth of the series of the cash flow may be obtained from Eq.

85% of the expected revenues = 42.44 × 0.85 = 36.07 lakh

This amount is less than the amount of loan (i.e. 40 lakh); therefore, the manufacturer will not
get the loan.
Slide 55

Ma1 Microsoft account, 06-01-2023

 Effect of Inflation on Cash Flows
• In general, there is inflationary trend in the cost of goods and services. At times,
reverse trend is also noticed.
• Monitory inflation occurs when the purchasing power of a currency (say rupee)
declines or, in other words, there is general increase in the level of prices in an
economy.
• On the contrary, deflation reflects an upward change in the purchase power of the
currency.
• Inflation may cause the borrowing cost to rise because the lender would demand a
higher rate of interest to counter the effect of inflation.
• Therefore, it is important to take anticipated inflation into account when estimating
the expected cash flows of an investment.
• The average rate of inflation is usually expressed as an annual percentage rate that
represents the annual increase in the sample prices of some stipulated “market
basket” of commodities (usually both goods and services) over one year period.
• The inflation rate has a compounding effect because its value for each year is based on
the previous year’s price.
• If Co is the present (initial) cost of a commodity and j1, j2, . . . jn is the rate of inflation
in year 1, 2, ..., n, then its cost at the end of corresponding years will be:
 Effect of Inflation on Cash Flows

If Co is the present (initial) cost of a commodity and j1, j2, . . . jn is the rate of inflation in year 1, 2,
..., n, then its cost at the end of corresponding years will be:

If j is the average rate of inflation during year 0 to year n, the cost Co changes to Cn as:
 Payback Period
Payback Period
Payback period is defined as the number of years required to recover the original cash investment.
In other words, it is the period of time at the end of which a machine, facility, or other investment
has produced sufficient net revenue to recover its investment costs.
Business firms are concerned with the number of years required to recover the initial outlay of an
investment. The payback period is found in two ways: conventionally and by discounting the cash
flow.

Simple (Conventional) Payback Period, nsp

Simple payback period is obtained by counting the number of years it takes for cumulative cash
receipts (benefits, Bn) to equal the cash expenses (costs, Cn).
 Payback Period

Q. A proposed solar PV street light will cost Rs 10,000 and last for 20 years. The savings of
electricity bill is estimated as Rs 900 per year. What is the simple payback period of the proposal?
Soln. Initial investment, Co = 10,000
Net annual savings = B = 900 per year
Now, Simple payback period, nsp =10,000/ 900
=11.11 years
This period is much less than the expected useful life of the street light. Hence, the proposal may be accepted.
 Payback Period
Q. The cash flows of three project proposals during their lifetime of 5 years are given in Table.
Calculate the simple payback period for each of them.

Soln. The cumulative cash flows for the above problem are given Table
 Payback Period
• Simple payback periods as seen from Table,
• For project A = 4 years
• For project B = 3 years
• For project C the cumulative cash flow becomes zero somewhere during year 4.
• If it is assumed that the cash flow of Rs. 1100 is uniformly distributed over the 4th year
• The exact value of simple payback period can be determined as:
• Simple payback period for project C = 3 + 300/1100
≈ 3.27 years
Discounted Payback Period, ndp
• Simple payback period fails to consider the time value of money.
• The discounted payback period accounts for the changing value of money over time.
• Therefore, the discounted payback period, ndp is the smallest n that satisfies:

where, i is the interest rate, or the minimum rate of return

 Payback Period
Q. For the cash flows of three project proposals given in the previous question, calculate the
discounted payback period for each of them, considering the rate of interest as 12%.
 Payback Period
• Looking at the cumulative cash flow, it can be
concluded that:
• For Project A the investment is not paid back
till the useful life of the project (5 years).
• Therefore, this is a net loss project and should
be rejected.
• For Project B: Discounted payback period,

For Project C: Discounted payback period

From discounted payback point of view, Project B is better as compared to Project C as the
investment is paid back earlier.
 Net Present Value, NPV
The net present value method requires that all cash flows be discounted to their present
value, using the firm’s required rate of return i. It can be expressed as:

where Bj stands for benefits at the end of period j and Cj for cost at the end of period
j and n is the useful life of the project.

In Co is the initial capital investment in the project and A is the uniform annual cash flow
of the project, the above relation becomes:
 Capital Recovery Cost (or Equivalent Annual Cost)
When a capital asset such as a machine or a computer is purchased, it is
expected that its use will generate enough income to recover the original cost
of investment. If Cnet is the net present cost of a machine, then the capital
recovery cost may be obtained by annualizing the cost as follows:

If Co is the initial cost of a machine, Ca is annual maintenance cost and S is its

salvage value after useful life of n years, then at discount rate of i, the net
present cost can be obtained as:
 Capital Recovery Cost (or Equivalent Annual Cost)

The cost of a 100-litre solar water heater is Rs 12,000. During its useful life of 20
years its routine annual maintenance will cost Rs 200. The replacement of
insulation in 12th year will cost Rs.3000. If its salvage value is Rs 1000, determine
the capital recovery cost for an interest rate of 11%.
 Capital Recovery Cost (or Equivalent Annual Cost)
Solution
Given:
Co = 12,000
Ca = 200
C12 = 3000
S = 1000
n = 20
i = 0.11
In Eq. adding a term for discounted cost of Rs 3000 over a period of 12 years,
Capital Recovery Cost (or Equivalent Annual Cost)