In this assignment your task is to create a cost-benefit analysis (CBA) for a water entitlement purchase and trade strategy as the basis for your benefits. All values are in today's dollar values. The nature of the farm is not important, as you will be looking to generate an income from speculating in the water and not using the water to irrigate commodities. Your income will be influenced based on the variability in water prices over a 10-year timeframe. You own high-security water entitlements (or water right asset) located in the Goulburn-Murray Water (GMW) delivery system of Victoria. The reliability for this asset changes over time; as such, you may want to research how the allocation changes year by year, as a basis for your assumptions and calculations. Based on the annual allocation determinations, your water entitlement generates an annual water allocation for you to trade. Depending on the state of nature, your allocation can range from 0% - 100% of the face value of the water entitlements. There are four states of nature in total. Table 1 defines the expected price for water bought/sold in the allocation market in the GWM between by alternative states of nature (i.e. wet, drying, drought and normal), while the figure below it provides an illustrative example of something similar from ABARES. These prices reflect the sale/purchase price in each state, and are used to inform your model. The respective nominal prices you are willing to agree to by state are: Table 1 Water Price Data State of Nature Wet Drying Drought Cost to purchase Water: $20.00 $120.00 $364.33 $85.90 Sale price of Water: $20.00 $200.00 $410.00 $90.00 Total en Normal Surface water allocation markets Baseline GMW fees and charges data When you own water there are costs for holding water entitlements and costs incurred for trading water in the market. Table 2 defines these costs. A full set of definitions related to the terms used in Table 2 is located in the glossary at the end of this document. Toble 2 Costs of Water Ownership & Engaging in the Woter Market Charge category: Annual service fee Annual infrastructure access fee Value Unit 110.00 $ 2870.00 $ 28700.00 $ 110.00 $ 7.20 $/ML Termination fees Annual drainage service fee Bulk water charges (high reliability entitlement) High reliability entitlement storage fees Change of ownership fee Copy of title record Issue/cancelation of water share Application to trade water allocation using GMW pool desk (buy or sell) 10.70 $/ML 80.00 $ 25.00 $ 193.00 $ 85.90 $ Drainage diversion agreement fee Buyer brokerage fee Seller brokerage fee Water share market buy price (high security right) Water share market sell price (high security right) Volume purchased-at start of speculation Volume sold - at end of speculation 2.15 S/ML 1.50 % of total 3.00 % of total 5350.00 S/ML 5885.00 S/M 100.00 ML 100.00 ML Interest rate for short-term loan (lowest found) Loan deposit (min 20%) 3.19% % (variable) 107000 $ Water share market buy price (general security right) Water share market sell price (general security right) Total loan principal - GS right (1 year) 1500.00 S/ML 1650 $/ML 150000 $85.90 $120.00 $364.33 $20.00 $/ML S/ML $/ML $/ML Price of water allocation - normal season Price of water allocation - drying season Price of water allocation - drought season Price of water allocation - wet season Source for price data: https://www.waterpool.org.au/permanentTrade.aspx interest rate data: https://www.canstar.com.au/interest-rate comparison/ Water allocation prices sourced from Waterfind Weekly Report Note that you are buying 100 megalitres (ML) of high-security entitlement to speculate with. At the end of the ten years, you will be selling the right at an assumed gain of a 20% increase on the purchase price, which will incur termination fees. Note: you cannot carry water over from one year to the next, and so you must close out your trade in every year. That is, if you do not sell water in a given year then you will lose it and not be able to profit from its trade in a subsequent year. We are also expecting you to provide us with a state-contingent version of your BCA. The initial set of assumed state of nature outcomes over the ten years are provided in Table 3 below: Toble 3 States of nature baseline data Year 1 Wet Speculator 10-Year States of Nature - Baseline Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Normal Normal Drying Drought Wet Normal Normal Year 9 Year 10 Drying Drought Note: this is akin to having certainty going forward, which is not realistic but indicative of using the past to inform the future. This also gives you a baseline scenario of pro abilities to work with as starting position. We will assume a discount rate of 5%, again as a base. Your costs of trade are the fixed costs specified above, plus your purchase costs for buying water by state. Your benefits are the value of the water you sell by state. See the Table on page 1 for details. From this data you must complete a benefit-cost evaluation over a ten-year period. This must comprise: i) the state of nature costs, ii) initial benefits, costs and cashflows and iii) discounted benefits, costs and cashflows to then evaluate: . The net present value of the investment The benefit/cost ratio, and The Return on Investment over the total period You will be expected to undertake sensitivity analysis on your data. Your trade activity will also attract capital gains tax (CGT) at a rate of 30% per annum, and this must be factored into your costs and paid each year. CGT only applies to any positive gains made from trade, and total benefits are thus the income generated less the CGT payable annually. The easiest way to deal with this may be to apply CGT as a flat reduction at the end of your initial BCA and calculate the NPV / B-CR / IRR for comparison. Finally, you must also establish at least a second set of state of nature scenarios, and then change the frequency data used in your original BCA to a different set of outcomes so that you can then compare the two BCA results. As part of the final report, use this comparison so that you can outline and discuss the scenario changes, how they differ from the base case, and what that means for the investment analysis and outcomes. If you want, you can then try out as many sensitivity tests as your model will handle, and you can justify on the basis of external sources, Glossary of terms: Fee Descriptions: Access Fee This fee recovers the costs of ensuring water is accessed in line with management rules and plans. This includes the management of allocations, rosters, restrictions and water ordering. Above Entitlement Storage Fee This fee is levied to ensure customers who hold more water in storage than their entitlement volume and contribute their fair share to water storage costs. Additional Service Point Fee This fee is charged for service points (meters and outlets) that are in addition to the main service point or the initial service point registered to the property. The fee recovers the costs of managing, maintaining and renewing the service points. Area Fee This fee recovers a proportion of the costs of operating, maintaining and renewing the drainage network that services your area. Casual Infrastructure Use Fee This fee applies to each ML of water you have delivered during the season in excess of your Annual Delivery Allowance (ADA). Your Annual Delivery Allowance is your delivery share (ML per day) multiplied by 270 for Gravity . Drainage Diversion Agreement Fee This fee recovers the cost of managing access to water available in the drains. Drainage Diversion Site Fee This fee recovers the costs of managing, maintaining and renewing drain diversion service points. Entitlement Storage Fee This fee recovers the cost of operating and maintaining water storages that service your regulated river system. The costs are charged per ML of entitlement. Flood Protection Fee The Loch Gary structure mitigates flooding for a defined area. This fee applies for each hectare in this area to recover the costs of operating and maintaining the structure. Infrastructure Access Fee This fee applies to the amount of ML per day of delivery share you hold and it recovers most of the cost operating. maintaining and renewing the delivery network in your irrigation district. The delivery network can include channels. pipes, bridges, road crossings siphons and subways. Infrastructure Use Fee This fee recovers a portion of the costs of operating, maintaining and renewing the delivery network in your Irrigation District. The fee applies per ML of water used during the season on your property. Local Benefit Area Fee This fee recovers a portion of the costs of providing subsurface drainage services and is charged per hectare of land owned in the area of influence of a subsurface drainage pump. Local Benefit Water Use Fee This fee recovers a portion of the costs of providing subsurface drainage services and is charged per ML of water used during the season to imgate land in the area serviced by a subsurface drainage pump. In this assignment your task is to create a cost-benefit analysis (CBA) for a water entitlement purchase and trade strategy as the basis for your benefits. All values are in today's dollar values. The nature of the farm is not important, as you will be looking to generate an income from speculating in the water and not using the water to irrigate commodities. Your income will be influenced based on the variability in water prices over a 10-year timeframe. You own high-security water entitlements (or water right asset) located in the Goulburn-Murray Water (GMW) delivery system of Victoria. The reliability for this asset changes over time; as such, you may want to research how the allocation changes year by year, as a basis for your assumptions and calculations. Based on the annual allocation determinations, your water entitlement generates an annual water allocation for you to trade. Depending on the state of nature, your allocation can range from 0% - 100% of the face value of the water entitlements. There are four states of nature in total. Table 1 defines the expected price for water bought/sold in the allocation market in the GWM between by alternative states of nature (i.e. wet, drying, drought and normal), while the figure below it provides an illustrative example of something similar from ABARES. These prices reflect the sale/purchase price in each state, and are used to inform your model. The respective nominal prices you are willing to agree to by state are: Table 1 Water Price Data State of Nature Wet Drying Drought Cost to purchase Water: $20.00 $120.00 $364.33 $85.90 Sale price of Water: $20.00 $200.00 $410.00 $90.00 Total en Normal Surface water allocation markets Baseline GMW fees and charges data When you own water there are costs for holding water entitlements and costs incurred for trading water in the market. Table 2 defines these costs. A full set of definitions related to the terms used in Table 2 is located in the glossary at the end of this document. Toble 2 Costs of Water Ownership & Engaging in the Woter Market Charge category: Annual service fee Annual infrastructure access fee Value Unit 110.00 $ 2870.00 $ 28700.00 $ 110.00 $ 7.20 $/ML Termination fees Annual drainage service fee Bulk water charges (high reliability entitlement) High reliability entitlement storage fees Change of ownership fee Copy of title record Issue/cancelation of water share Application to trade water allocation using GMW pool desk (buy or sell) 10.70 $/ML 80.00 $ 25.00 $ 193.00 $ 85.90 $ Drainage diversion agreement fee Buyer brokerage fee Seller brokerage fee Water share market buy price (high security right) Water share market sell price (high security right) Volume purchased-at start of speculation Volume sold - at end of speculation 2.15 S/ML 1.50 % of total 3.00 % of total 5350.00 S/ML 5885.00 S/M 100.00 ML 100.00 ML Interest rate for short-term loan (lowest found) Loan deposit (min 20%) 3.19% % (variable) 107000 $ Water share market buy price (general security right) Water share market sell price (general security right) Total loan principal - GS right (1 year) 1500.00 S/ML 1650 $/ML 150000 $85.90 $120.00 $364.33 $20.00 $/ML S/ML $/ML $/ML Price of water allocation - normal season Price of water allocation - drying season Price of water allocation - drought season Price of water allocation - wet season Source for price data: https://www.waterpool.org.au/permanentTrade.aspx interest rate data: https://www.canstar.com.au/interest-rate comparison/ Water allocation prices sourced from Waterfind Weekly Report Note that you are buying 100 megalitres (ML) of high-security entitlement to speculate with. At the end of the ten years, you will be selling the right at an assumed gain of a 20% increase on the purchase price, which will incur termination fees. Note: you cannot carry water over from one year to the next, and so you must close out your trade in every year. That is, if you do not sell water in a given year then you will lose it and not be able to profit from its trade in a subsequent year. We are also expecting you to provide us with a state-contingent version of your BCA. The initial set of assumed state of nature outcomes over the ten years are provided in Table 3 below: Toble 3 States of nature baseline data Year 1 Wet Speculator 10-Year States of Nature - Baseline Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Normal Normal Drying Drought Wet Normal Normal Year 9 Year 10 Drying Drought Note: this is akin to having certainty going forward, which is not realistic but indicative of using the past to inform the future. This also gives you a baseline scenario of pro abilities to work with as starting position. We will assume a discount rate of 5%, again as a base. Your costs of trade are the fixed costs specified above, plus your purchase costs for buying water by state. Your benefits are the value of the water you sell by state. See the Table on page 1 for details. From this data you must complete a benefit-cost evaluation over a ten-year period. This must comprise: i) the state of nature costs, ii) initial benefits, costs and cashflows and iii) discounted benefits, costs and cashflows to then evaluate: . The net present value of the investment The benefit/cost ratio, and The Return on Investment over the total period You will be expected to undertake sensitivity analysis on your data. Your trade activity will also attract capital gains tax (CGT) at a rate of 30% per annum, and this must be factored into your costs and paid each year. CGT only applies to any positive gains made from trade, and total benefits are thus the income generated less the CGT payable annually. The easiest way to deal with this may be to apply CGT as a flat reduction at the end of your initial BCA and calculate the NPV / B-CR / IRR for comparison. Finally, you must also establish at least a second set of state of nature scenarios, and then change the frequency data used in your original BCA to a different set of outcomes so that you can then compare the two BCA results. As part of the final report, use this comparison so that you can outline and discuss the scenario changes, how they differ from the base case, and what that means for the investment analysis and outcomes. If you want, you can then try out as many sensitivity tests as your model will handle, and you can justify on the basis of external sources, Glossary of terms: Fee Descriptions: Access Fee This fee recovers the costs of ensuring water is accessed in line with management rules and plans. This includes the management of allocations, rosters, restrictions and water ordering. Above Entitlement Storage Fee This fee is levied to ensure customers who hold more water in storage than their entitlement volume and contribute their fair share to water storage costs. Additional Service Point Fee This fee is charged for service points (meters and outlets) that are in addition to the main service point or the initial service point registered to the property. The fee recovers the costs of managing, maintaining and renewing the service points. Area Fee This fee recovers a proportion of the costs of operating, maintaining and renewing the drainage network that services your area. Casual Infrastructure Use Fee This fee applies to each ML of water you have delivered during the season in excess of your Annual Delivery Allowance (ADA). Your Annual Delivery Allowance is your delivery share (ML per day) multiplied by 270 for Gravity . Drainage Diversion Agreement Fee This fee recovers the cost of managing access to water available in the drains. Drainage Diversion Site Fee This fee recovers the costs of managing, maintaining and renewing drain diversion service points. Entitlement Storage Fee This fee recovers the cost of operating and maintaining water storages that service your regulated river system. The costs are charged per ML of entitlement. Flood Protection Fee The Loch Gary structure mitigates flooding for a defined area. This fee applies for each hectare in this area to recover the costs of operating and maintaining the structure. Infrastructure Access Fee This fee applies to the amount of ML per day of delivery share you hold and it recovers most of the cost operating. maintaining and renewing the delivery network in your irrigation district. The delivery network can include channels. pipes, bridges, road crossings siphons and subways. Infrastructure Use Fee This fee recovers a portion of the costs of operating, maintaining and renewing the delivery network in your Irrigation District. The fee applies per ML of water used during the season on your property. Local Benefit Area Fee This fee recovers a portion of the costs of providing subsurface drainage services and is charged per hectare of land owned in the area of influence of a subsurface drainage pump. Local Benefit Water Use Fee This fee recovers a portion of the costs of providing subsurface drainage services and is charged per ML of water used during the season to imgate land in the area serviced by a subsurface drainage pump