Instructions:

This assignment will consist of a group task worth 30% and an individual reflection worth 10%,for a total of 40% of your final grade. The case study can be done individually or as a group. Please note that this task is a significant amount of work for an individual, so groups are encouraged.

The  assignment  must  be  submitted  electronically  through  the   Online   Submission  links  in  the Assessment section of the Course Blackboard site.

•    Part  1  MUST  be submitted as an Excel file (.xls or .xlsx) – only one submission per group is required.

•    Part 2  MUST  be submitted as a Word file (.doc or docx) – only one submission per group is required.

•    Part 3 MUST be submitted as a Word file (.doc or .docx) – each student must submit their own reflective task for marking.

Further details to be announced on Blackboard.

Groups must be finalised by 5pm, 3rd November. No changes are allowed after this date.

Remember that each value should be entered into the spreadsheet only once.

Marked out of 80 points (weighted to 40% of your final grade).

Background:

The Queensland Government has committed to achieving net-zero emissions by 2050, with an interim target to reduce emissions by 30% below 2005 levels by 2030. Specifically, Queensland possesses abundant resources suitable for diverse renewable energy sources, including extensive land wealth that benefits the agricultural sector.  The Government aims to focus on renewable energy to offset CO2 emissions and aims to produce 80% of its energy from renewable sources by 2035. This policy has attracted  investors  to  explore   potential  investments  in  producing  renewable  energy  from  the agriculture sector, including biodiesel feedstock from Pongamia. Pongamia is a native tree species in Queensland  that  presents  an  opportunity  for  sustainable  and  lower-emission  production  as  an alternative to non-renewable transport fuels.

BioHarvest Energy is a new renewable energy company that is considering investing in Pongamia to produce biodiesel feedstock in Queensland. To assist in evaluating the investment, BioHarvest Energy has asked you to provide a cost-benefit analysis (CBA) to determine the feasibility of the project. This project aims to offset CO2  emissions in support of the Queensland Government's policy of achieving net-zero emissions by 2050.

BioHarvest Energy is expected to commence production in 2024 and will operate for 20 years. The initial capital investment is scheduled for 2023. In your report to BioHarvest Energy, you will need to discuss the results from the Investor, Social, and Disaggregated analyses. You will also need to consider any relevant literature or reports on the evaluation of the external benefits of Pongamia biodiesel as part of the renewable energy program for the government and local communities.

Part 1- Spreadsheet Group Task - 30 marks (15%)

[Use the template Excel File on the BB website]

a)    Market and Investor Analysis

BioHarvest Energy currently does not have any land holdings and plans to rent the land used for the project. To  begin the  project,  BioHarvest  Energy  will  need  to  invest  $105,000.00  in  planning  and infrastructure as part of the project development phase in year zero. In addition to this, BioHarvest Energy has the permission of the landlord to clear and prepare the 250 hectares of land. This will cost $350 per hectare. Additionally, BioHarvest Energy will need to purchase the following items as part of the initial investment:

-      40,400 Pongamia nursery trees. Each tree costs $6.00.

-      500 megalitres (ML) of water storage capacity at a cost of $1,750.00 per ML.

-      200 hectares for Pongamia plantation area will require drip irrigation at a cost of $3,500.00 per hectare.

-      One-time investment in sheds and housing at a cost of $125,000.00.

-      One farm vehicle at a cost of $60,000.00.

For the following year in 2024, BioHarvest Energy will purchase another 40,400 nursery trees and an additional 6 units of farm vehicle at the same cost.

As part of the project, BioHarvest Energy will need to invest in working capital in 2026 to assist in the harvesting process. The working capital items have been provided in Table 1.

Table 1: Working Capital

In addition to the working capital, BioHarvest Energy expects the following operating costs:

Table 2: Operating Costs

Every year, the company will  have to  pay  a  contractor for  slashing, weeding &  pest  control  and irrigation maintenance. This is expected to cost $34,000. Furthermore, BioHarvest Energy will require a business license, which must be renewed each year at a cost of $60,000. As for the land lease size, BioHarvest Energy will use 200 hectares for the Pongamia plantation areas. The additional 50 hectares have been allocated for the harvesting areas, which include sheds, housing, roads, storage facilities etc.

The wage expenses for the project include:

-      TWO site managers at a salary of $150,000 per year.

-      The project requires 5 casual workers who are expected to work only 90 days of the year on average. Each day of casual labour is expected to cost $250 per worker.

BioHarvest Energy will be required to pay insurance, which amounts to 2.5% of the initial investment cost (fixed costs), including the additional investment in 2024 .

For the harvesting process, BioHarvest Energy will need to incur additional operating costs starting in 2026 for seed, meal, and oil processing, at a cost of $250,000 every year. BioHarvest Energy will also require yearly tree pruning at a cost of $55,000, starting in 2034.

To finance the initial investment costs, BioHarvest Energy will takeout a business loan of $850,000 at an interest rate of 6.5% per annum. The loan will have a 12-year term starting from 2024. Additionally, in 2026 BioHarvest Energy will takeout a balloon loan of $250,000 to help pay for the working capital purchase in 2026 at an interest rate of 8.9%. This second loan will have a balloon option of 30% (a lump sum payment at the end of the loan) and a term of 4 years with repayments starting in 2027. The company will use the interest rate of the balloon loan to determine the repayments for the loan (i.e., the 8.9% fixed rate). Both loans are from foreign banks.

For depreciation purposes, only the following assets are eligible to be depreciated:

Table 3: Depreciation

Note that all farm vehicle expenses are depreciated starting in 2024. The tax rate on profits is 30%. Assume the salvage value for all investment costs is 10% of the initial fixed investment cost plus 10% of the additional investment cost (for capital purchased in year 2024).

BioHarvest Energy expects to start harvesting Pongamia seeds in 2026 but expects to achieve only 50% Pongamia propagation capacity of the targeted 12 tonnes of Pongamia seeds per hectare per year. This propagation capacity is expected to increase to 75% in 2027 and reach 100% in 2028 and beyond.

There are three sources of revenue to calculate the expected revenue, and BioHarvest Energy provides you with the following information.

1)   40% of the Pongamia seed production per hectare will produce oil for biodiesel feedstock. The oil price is $1.25 per litre.

2)   60% of the seed yield will produce meal for livestock, potentially earning $0.38 per kilogram of meal.

3)    Pongamia pods contain one or two Pongamia seeds. The pods can be used to produce biomass fuel. The estimated weight of pods production is equivalent to 90% of the Pongamia seed production per hectare. The pods can be sold for a benefit from $0.05 per kilogram of pods.

The capacity for operating and production in this project differs from that of a common CBA project due to the fact that Pongamia trees require sometime to develop to harvest the seeds. To account for this, assume that the project is expected to reach 50% capacity in 2024, 75% capacity in 2025, and full capacity in 2026 for operating capacity.

Using a conversion factor of 10,000 and the information above, you have been asked to calculate the following:

i)    The IRR and NPV for the Market Analysis at a 5%, 10% and 15% real discount rate.

ii)   The IRR on equity and NPV for the business at a 5%, 10% and 15% real discount rate for the Investor Analysis.

b)   Social Analysis

You now need to consider the social CBA. Due to taxes, duties, and subsidies we are required to calculate the relevant shadow prices for the following:

Table 4: Taxes and Subsidies *remember that duties are only paid once.

It is also noted that land has an opportunity cost of $0 and the opportunity cost of labour is 45% of the market wage for casual workers. The site manager is employed from elsewhere and should be costed at the market wage.

You have conducted some preliminary research on the external benefits of Pongamia trees that can offset CO2  equivalent emissions by 17.6 tonnes per hectare. However, this is dependent on the age and size of the trees. It is anticipated that from the first year to year 9, only 50% of this carbon offset benefit is observed. Between years 10 and 15 the trees are at maturity and will provide a 100% offset. However, in the last stages of their life the carbon offset of the trees falls to 75% of the total expected benefit.

To estimate the external benefits of the Pongamia trees offset CO2, you are required to find the price of CO2  in Australian Agriculture per tonne.

i)            Building on the spreadsheet completed in a), calculate the NPV and IRR of the Social Cost Benefit Analysis using a 5%, 10% and 15% discount rate.

c)    Disaggregated Social Analysis

Now you want todisaggregate the results of the analysis. In this case you would like to evaluate who gains and who loses from the project. As part of the approach to disaggregation you are asked to exclude the private investor and the foreign bank from the Total Disaggregated CBA, and then identify the  remaining  stakeholders  with  standing.  The  remaining  stakeholders  include  landowners,  local labour, local communities, and the government. Using the template identify:

i)            The  NPV for the total disaggregated group of interest (without the investor and foreign bank) using a 5%, 10% and 15% discount rate.

ii)           The NPV for each remaining stakeholder group using a 5%, 10% and 15% discount rate.

d)   Sensitivity Analysis

Nowas part of the cost-benefit analysis, BioHarvest Energy is interested in evaluating the assumptions and how sensitive or insensitive the results are to the best guess inputs. Specifically, BioHarvest Energy would like to answer the following:

i)            There are two key uncertainties for BioHarvest Energy. The price of oil and the biodiesel feedstock production per hectare in litres. BioHarvest Energy would like to see how the NPV changes for the investor analysis at the 5% discount  rate. Allow the  per  hectare production change between 4400, 4800, and 5200 litres and the price of biofuel oil to vary between $1.00, $1.25, and $1.50 respectively. Comment on the results.

ii)           BioHarvest Energy would like to achieve a minimum of 10% IRR as the investor. Use the “Goal Seek” command to identify the minimum price BioHarvest Energy can charge for oil per litre that would achieve this.

iii)          Given  the  current  government  initiatives,  BioHarvest  Energy  is  considering  asking  for additional tax  breaks from the government to support the project.  BioHarvest  Energy would like to achieve an NPV of $600,000 at a 5% discount rate. How much would the tax rate need to decrease to achieve this?