Construction on Hoover Dam was started in 1931 and finished in 1935, and the dam was in service from 1936. When completed, it was both the world's largest electric power producing facility and the world's largest concrete structure. It cost $165 million dollars to build (in 1935 dollars). The average annual net generation for Hoover Power plant for operating years 1947 through 1994 was about 4 billion kilowatt-hours. The operating cost during this period was 0.6 cents/kWhr (in 1990 dollars).
The interest rate charged to the project was low, "not exceeding 3%." Given these facts, answer the following questions related to the Hoover Dam for its operation up to 1994 when the loan was fully repaid.
a) Calculate the Cost of Energy (COE) for the period 1947 to 1994. Assume an average annual inflation rate of 3.5% for converting between present value and past value.
b) If the interest rate were to have been 1.5 percentage points above the original rate, calculate the COE for the same period.
c) i) Given that government backed projects are able to obtain financing at lower interest rates than purely private projects, can you comment on the importance of government involvement in such large infrastructure projects
ii) Why is the government able to get lower interest rates?
iii) By what mechanism does the government do this?
iv) who ultimately guarantees the loans?