1. To qualify as official development assistance (ODA), development loans must have a grant element of at least 25 percent, calculated using a stated annual interest rate of 10 percent. After the Solomon Islands earthquakes, new US Secretary of State John Kerry toured the quake-stricken country and promised the following loan: $100 million, to be amortized over 6 years by 12 semi-annual payments, after a grace period of 4 years during which only interest would be paid semi-annually. The US would charge interest at a stated annual rate of 6 percent. Determine whether or not this loan would qualify as ODA. What is the maximum interest rate the US could charge for this loan to qualify as ODA?
2. One of the projects the US loan would fund is to build earthquake-resistant buildings. The project will begin in March 2013, last for two years and is expected to have the following expenditures: start-up costs of $200,000 paid at the beginning of the first month; rental of equipment to be paid at the beginning of the month that will be $100,000 each month for the first year, but $50,000 each month for the second year;
material costs to be paid at the end of each month that will be $30,000; personnel costs of
$100,000 to be paid at the end of each month; and end-of-project clean-up costs of
$100,000 that will be paid at the end of the last month (February 2015). Suppose that with the fiscal cliff looming in March 2013, Secretary Kerry is only willing to allocate
$3,000,000 of the US loan at the start of the project due to this concern. These funds are put into an account that pays interest at a stated annual rate of 12 percent, compounded monthly. Calculate how much this project needs at the beginning of the second year that would be necessary to cover its expected expenditures.