[sml0820]

A Chinese man, who makes a living building various forms of infrastructure, is willing to put $300 million of his own money of $50 billion required into building infrastructure in Nicaragua. Meanwhile Nicaragua is willing to accept $50 billion of infrastructure investment. Sounds like wishful thinking from both sides.

As far as Oil, building a canal is not the way to reap rewards from oil. Here is a more relevant quote "U.S. firm, Noble Energy has given up on an exploratory oil well in Nicaragua, dubbed “Paradise 1,” after spending $90 million at the site. The firm concluded that there was not oil in sufficient quantities to justify further investment in the site." November 15th, 2013

[sml0820]

Also, to further clarify from an investor perspective:

Let's say the canal is able to generate twice the income (revenue minus costs) that panama canal currently generates indefinitely, which comes to 2.8 billion every year forever.

Let's assume the cost of capital for this project is 10% (a standard amount depending upon the investors).

With a 50 billion dollar initial investment the Net Present Value of the project is -22 Billion. In other words, in an ideal scenario the investors are better off lighting 21 billion dollars on fire right now than investing in the project...run.

[notahacker]

The weird thing is despite those numbers I'm looking at a $50bn construction cost and thinking "that sounds cheap". The UK and California propose to spend more on building rail lines of a similar length.

Obviously labour and land costs are and order of magnitude or two lower in Nicaragua, but $50bn still sounds like a low-end estimate for an engineering project of that scale.

[Retric]

Using 10% for cost of capital for a construction project is ridiculous. Direct loan costs often run at around 6% but can be as low as 4%.

Considering the number of Ghost city's built in China he might have access to even cheaper capital.

[sml0820]

This comment could not be further from the truth, as I feel you do not have strong basis in understanding what the weighted cost of capital refers to.

Here is an example calculation of an infrastructure project:

http://investment.infrastructure.gov.au/publications/reports...

Also, your ghost city comment is irrelevant, which I already addressed in a prior comment.

And as a final point, even with a 6% WACC in an ideal scenario, which I addressed, the NPV is still -3.33 billion.

[Retric]

The most important equation in that was this:

  Dr * (1 – EQ) + Er * EQ 
  Where: Dr = the appropriate return for debt funding invested 
  Er = the appropriate rate for equity funding invested 
  EQ = the proportion of funding invested as equity 

While it does not take into account risk it separates out private equity vs loans. If you get a loan at 6% for 90% of a project's costs and that project returns 6.5% then your private equity return is 6.5% + 9 * .5% = 11%.

Thus, if you can get a vary low interest loan say 2% your private return can be high even if the project barely breaks 2%. Why might he be able to get a loan for 2%, well China might look at having an alternative to the panama cannal in another country as worth a vary low interest loan.

Or far more likely IMO the project might be building more than just a canal as infrastructure projects often make other local investments vary valuable. AKA build a subway and now every apartment within walking distance is suddenly worth significantly more.

[lmg643]

>> "willing to put $300 million of his own money of $50 billion required into building infrastructure"

I would expect his funding expectations are based on what he could borrow in China to finance this. Based on the number of "ghost cities" that have been constructed - not just buildings, but entire cities with no occupants or revenues - it's not out of the question.

I think this gives us a sense of how bad banking problems are in China.

[sml0820]

China's ghost cities are unrelated to this. When China invests in ghosts cities their GDP goes up based upon infrastructure spending. In other words, one of the reasons why China invests so much in infrastructure, some of which is never used, is because it pushes their GDP numbers higher.

That being said, the Canal Project would affect Nicaragua's GDP and would have no bearing on China's. Nicaragua's GDP is roughly $10 billion, so it would have a very large impact.

There is no financial benefit for the Chinese government to back up such a project, and the political benefits seem dubious.

This project will not happen, and its unfair to the people of Nicaragua to give them false hope of better economic prosperity from the project.