Reference no: EM131026316

BASIC ASSUMPTIONS: 

• A 6m3 fixed-dome biogas plant (size for a small farmer family) costs 660 USD, and has a 15 year economic life-time;
• By using biogas instead of kerosene and LPG, and by using the resulting bio-slurry to replace chemical fertiliser for agricultural needs, a farmer can save on average 147 USD p.a. (given fixed prices);
• Interest rates for annuity loans under 1,000 USD are 36 percent p.a. (monthly equal instalments); the loan tenor is 12 months.

QUESTIONS: 

1. What are the internal rate of return (IRR) and payback period of the biogas investment - considering the savings on kerosene, LPG and fertiliser as revenues (i.e. positive cash flow)? How do you interpret the results with regard to the investment's overall attractiveness and financing requirements for the farmer? (approx. ½ page) (15 points) 

2. Assuming a positive net present value (NPV) of the investment, the initial capital expenditure (CAPEX) is often not affordable for small farming households. A bank loan could help the farmer to purchase the biogas plant. It is initially assumed that there is no down-payment (equity contribution) from the borrower, and no subsidy from third parties - i.e. the CAPEX has to be fully covered by the loan. 

a. What is the monthly instalment (repayment and interest) to pay back the annuityloan? (10 points) 
b. What is the total (accumulated) interest amount paid after 12 months? (5 points) 
c. How does the total payment over 12 months (initial loan amount plus accumulated interest) relate to the annual savings the farmer can generate from not anymore using kerosene, LPG and chemical fertiliser (again considering thesesavings as revenues, and having in mind that farmers perhaps do not haveregular monthly income)? (approx. ½ page) (10 points) 

3. Given the high interest rates (36 percent p.a.), an international donor institution temporarily offers an 'interest softening' mechanism, reducing the interest for ultimate borrowers substantially to 9 percent p.a. In turn, local FIs expand the loan tenor to 3 years (still monthly equal instalments). 

a. What impact do these new loan conditions have on the farmer's annual instalments? How much household income (in addition to fuel and fertiliser savings) would be required per year for paying back the loan? (10 points) 
b. How much would the donor contribute to financing of the biogas plant, both in absolute terms (USD), and relative to the initial investment costs (CAPEX) of the plant? What could be the concerns of subsidising a large share of the investment costs through this interest softening mechanism? (approx. ½ page) (10 points) 
c. In what way does the interest softening mechanism, combined with the extended loan tenor, improve the farmers' access to finance, and justify the involvement of the financial sector? (approx. ½ page) (10 points) 

4. Given the high demand for domestic biogas plants, and assuming that - even with interest softening and tenor extension as described under task 3 - still many farmers cannot afford a loan, the same donor institution decided to additionally provide a 30 percent CAPEX subsidy. 

a. What impact does the CAPEX subsidy have on loan amount, annual instalments, required household income, and the donor's contribution to financing of the biogas plant? (10 points) 
b. What are the pros and cons of providing a one-time (up-front) subsidy payment? (approx. ½ page) (10 points) 

5. The donor institution offers both support mechanisms - interest softening and CAPEX subsidy - only temporarily. What could be the reasons for the temporary nature of theseinterventions, and what positive effects does donor presumably aim for after withdrawing from the market? (approx. ½ page) (10 points