TECHNICAL NOTE—LOAN SUBSIDY VALUATION

Loan subsidies are sometimes offered in connection with investment projects. It is convenient to view such subsidies as financing side effects providing value additions to project net present values without loan subsidies. A number of different methods for loan subsidy valuation have been suggested in the literature and by project appraisal practice. Four methods are outlined and applied to a subsidized loan example taken from a prominent text book. A combination of two of those methods is recommended for practical applications. The other two methods are not recommended.