BIO DIESEL A FUTURISTIC AND ALTERNATE GREEN FUEL, AN EMERGING BUSINESS OPPORTUNITY

CMA Raveendranath Kaushik. N and Dr. Ramana Gowda Business Consultant , rk.rkaushik@gmail.com

Abstract In the last four decades energy crisis has gripped the world at large originating with the oil crisis of 1970s. The problem has reached an alarming dimension because of depletion of reserves, environmental concern and capital scarcity in recent past. There fore efforts have being made for improving energy use efficiency and conservation of scarce energy resources. At present the uses of hydro carbon have been causing a global warming affecting the environment. Under these circumstances the emphasis is to promote renewable green energy and hence bio fuel is gaining importance as an alternate to fossil fuel world wide. India is the fore runner to introduce bio fuel policy to encourage the use of non edible oil in the production of bio fuel to replace their partial need in transport and other allied industries.

In India non edible, drought tolerant oil seed, crops and plants suitable for waste lands are encouraged to establish bio fuel plantation. Out of 300 species of trees which produce oil bearing seeds, Pongamia, Jetropa, Neem, Castor etc are highly acclimatized for very harsh condition of biotic and abiotic situations. Pongamia is a perennial tree crop propagated by seeds. Since, the gestation period in case of seeded plantations is longer and takes 78 years for bearing, high yielding grafted saplings raised in poly bags are preferred for early and regular bearing. Benefit cost ratio in Pongamia is 5.03. The other indicator like pay back period will earn back all the capital, operating cost in 4 years 3 months period. While the IRR indicates the rate of return on investment which is equal to that of discount rate that would yield 0 NPV. The modified IRR is 19%. All the above facts are based on Pongamia plantation developed on an area of 15 hectares with an investment of Rs23 Lakhs and the tenure is over a period of 30 years. The project evaluation criteria, the investment on bio-fuel plantation is economically viable and highly profitable to meet the energy crisis of the globe. There fore the strength of the bio fuel plantation should be considered as a great scope for the investors in the bio fuel plantation.

Economic Viability and Feasibility analysis of Bio Fuel plantation A Case Study The profitability of a new venture depends on the viability of the project. Cost effectiveness is highly important for any project to pay off, particularly, in agriculture. It is important to examine the viability of investment, especially, in case of perennial crop enterprises because of the long-term financial commitment and the involvement of high capital investments. Cost effectiveness is a must in perennial and rainfed farming systems since benefit stream from initial investments are accruing far off in the future where capital costs are usually high in the early years of the project. In the present case Pongamia plantation, which is important non- edible oil seed for bio-diesel also involves high initial investment and little or no investment after the establishment of the plantation. However, the income stream continues over a period of sixty years or more. To increase the viability and profitability of the project, castor another important short duration annual oil seed crop is planned as a catch crop in the initial four years till the Pongamia plantation is established and reaches the full bearing stage. An evaluation the feasibility of investment in Pongamia plantation, the project evaluation criteria such as net preset worth (NPW), benefit cost ratio (B:C ratio), internal rate of return (IRR) and payback period are employed. The analysis was done for the project as a whole for 30 acres Pongamia plantation for economic life period (30 years) and catch crop, castor for the

initial four years using a discount rate of 12 per cent, the lending rate followed by the commercial banks. The result of the analysis is presented in Table-I.

Table-I: Evaluation of Investment in Pongamia Plantation

Sl. No. 1 2 3 4 5

Feasibility Parameter Net present worth (NPW). B:C ratio. Internal rate of return (IRR). Modified IRR. Payback period.

Estimated value $ 438078 5.03 46% 19% 4 years 3 months

Net Present Worth Net present worth of the investment is the sum of the difference between the present value of the series of returns and costs over the economic life period of Pongamia plantation. The net present worth of the project is $ 438078 . This is positive and very high indicating that the investments in Pongamia plantation is economically viable and financially sound. Benefit Cost Ratio Benefit cost ratio indicates the return per rupee of investment in Pongamia plantation. The B:C ratio is 5.03 which again indicates that investment in Hong plantation is highly profitable.

Internal Rate of Returns The IRR measures the rate of returns that can be realized by investing the return in Pongamia plantation. IRR indicates the rate of return on investment which is equal to that discount rate that would yield zero NPW. The IRR again is 46 per cent and very high. The modified IRR (MIRR) from the project is 19 per cent. The MIRR is a more realistic measure of economic viability of the project since the surpluses generated in Pongamia plantation are not reinvested in the same project. It is, therefore, assumed that the surpluses generated from Pongamia project each year is not reinvested in the project and these surpluses have an opportunity cost of 10 per cent. Further, an allowance of 20 per cent of the project revenue is accounted for weather and market related risks by reducing the projected benefits 20 per cent in case of MIRR. Since the MIRR is greater than 12 per dent, it covers the cost of the capital or opportunity cost of capital and hence viable and highly profitable. Pay Back Period The results indicate that the investments made in Pongamia plantation can be recovered in less than five years. It indicates that the project will earn back all the capital and operating costs expended on the project in 4 years and 3 months period. Thus based on the project evaluation criteria, the investment on Pongamia plantation is economically viable and highly profitable and bankable enterprise. The details of the financial benefits cost stream of the project is provided in Table II.

Table II. Economic viability of 12 hectare Pongamia plantation project, futuregreen. 25 1500 1500.00 96000 76800 Pongamia 26 1500 1500.00 96000 76800 Total Total Castor Pongamia establishment, Castor Year Investment project 27 1500 1500.00 96000 76800 maintenance cost cost benefit benefit benefit 28 1500 1500.00 96000 76800 cost 29 1500 1500.00 96000 76800 1 26875 5850 4826.25 37551.25 11625 9300 30 1500 1500.00 96000 76800 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1125 1125 1125 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 4826.25 37551.25 11625 4826.25 37551.25 11625 4826.25 37551.25 11625 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 9300 9300 9300 21600 21600 21600 21600 21600 43200 43200 43200 43200 43200 43200 43200 43200 43200 43200 76800 76800 76800 76800 76800

75300 75300 Net 75300 cash flow 75300 75300 75300 28251 8175 8175 8175 20100 20100 20100 20100 20100 41700 41700 41700 41700 41700 41700 41700 41700 41700 41700 75300 75300 75300 75300 75300

27000 27000 27000 27000 27000 54000 54000 54000 54000 54000 54000 54000 54000 54000 54000 96000 96000 96000 96000 96000

B: C ratio 5.03 IRR: 46% MIRR: 19% Pay back 4 years 3 months* 1 $ = 40 Hectare = 2.5 acre

Conclusion The above case study of the project implemented during 2008 in a highly degraded land under rain fed situation clearly shows that the Bio Fuel plantation mainly Pongamia is economically viable, physically possible and farmer friendly. The pay back period is an important tool for the investors indicates only 4 years from the date of start. Subsequent years the profit, productivity and other opportunity benefit will be cost free. The overall benefits derived from the Bio-Fuel plantation are environmental improvement may be established as a good companion crop besides sole plantation and also the Pongamia cake, a byproduct acts as a good organic manure.