Methyl ester production from groundnut oil was optimized. The optimum catalyst concentration, amount of ethanol used per liter of oil, reaction time, and temperature was found. This groundnut oil-derived biodiesel was tested in a direct injection, naturally aspirated, single-cylinder diesel engine. The diesel engine was operated from no load to full load condition. Effect of this biodiesel on engine parameters, namely: fuel consumption, electrical efficiency, lower heating value, higher heating value, and engine speed was examined, and also the physical and chemical properties, such as specific gravity, moisture content, refractive index, acid value; iodine number, saponification value, and peroxide value of the methyl esters used in this study were estimated. Based on electrical efficiency, the methyl esters obtained from groundnut oil were found to be a good alternate fuel in internal combustion engines with electrical generators.