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Objectives, Methodology and Decision Criteria
As soon as the cost and benefit components of a biogas plant in planning can be quantified, and as soon as other important parameters (time horizon, interest rate, annual allowances, exchange rates, inflation rates) are determined, the economic viability of a biogas plant can be calculated.
Typically, the financial analysis of projects points out the financial viability of investment alternatives.
Three types of questions need to be answered:
- Which project is the least expensive among an array of options that produce the same output (least cost analysis)?
- Which project shows the highest net benefit (benefit minus cost) among an array of options (cost benefit analysis)?
- Is a project a financially viable solution to the problem on hand? (absolute viability, i.e. the question is dealt with whether the project's revenues are sufficiently high to meet capital cost and operating cost), and:
Is a specific project more economical than others? (relative viability).
Procedure of Dynamic Approach
Due to the fact that the same amount of a credit or debit can have a very different value depending on when the transaction takes place, dynamic analysis differ from the static methods.
The need for a dynamic approach results from the fact that, as the costs and benefits of each option arise in different years, it is necessary to make them comparable.
The value which says how much a future or past payment is worth at the present time is described as its present value (PV).
Given an investment of a biogas plant of 2000 US$ in two years (discounting), having paid three years ago 120 US$ for the necessary landed property (compounding), with a given interest rate of 8%, the PV is as follows:
PV = [2000/(1,08)2 + 120*(1,08)3]
It is calculated from its past amount by compounding or from the future amount by discounting with the aid of a factor which depends on the interest rate adopted and the length of time between the payment and the present period.
The dynamic approach deals with a consideration of benefits and costs over several years and therefore shall be pointed out more detailed:
Investment criteria are, as follows:
Net Present Value (NPV)
The most common investment criteria is the NPV and is defined as follows:
NPV - Net Present Value
Ct - Costs in year t
Bt - Benefits in year t
k - discount rate
t - number of years from the present
n - total number of the years of the analysis period