Question

3. The World Bank is considering whether to lend a country money to build a new water supply project that will allow the country to increase its acreage of irrigated crops. The new irrigated crop acreage is expected to generate increases in exports amounting to $1,000 million annually in addition to increases in domestic food sales of $200 million annually. The water supply project will cost $5,000 million up front and $10 million a year for operation and maintenance. The World Bank will charge the country an interest rate of 5%, compounded annually and payable over 50 years. If the country is able to tax exports at a rate of 25% and domestic sales at a rate of 5%, will the project generate sufficient income to pay back the loan and cover the project’s operating costs?

Answer 1

Particulars	Amount in Millions
Cost of the Loan
A. Interest Cost ($5,000 Million @ 5 %)	$250.00
B. Operation and Maintenance	$10.00
C. Total Annual Cost (A+B)	$260.00
Additional Revenue
D. Tax on Additional Export ($1,000 Million *25%)	$250.00
E. Tax on Additional Domestic sales ($200 Million * 5%)	$10.00
F. Total Additional Revenue (D+E)	$260.00
Net Profit (C-F)	$0.00
Principal Repayment	-$5,000.00
Solution - Additional Revenue generation by governement on project is sufficient enough for covering Project's operating costs only. Government will fall short of $5,000 Million of principal repayment