[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.