ECON2101 Cost Benefit Analysis Final Case Study - Oyster Farming Investment

ALL SECTIONS DUE, 3pm 10th November. Submitted online.

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 of TWO students. 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 . 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

Queensland’s oyster industry has declined due to environmental pressures and QX disease affecting the Sydney Rock Oyster (Saccostrea glomerata), particularly in Moreton Bay where climate variability intensifies vulnerability. Recent research by the Fisheries Research and Development Corporation (FRDC) indicates new potential through the Blacklip Rock Oyster (Saccostrea  echinata) and  the Queensland Sunshine Oyster, which show greater resilience, faster growth, and suitability for local conditions.  Advances in hatchery and nursery techniques have further improved  survival and productivity, offering a pathway to revitalise the industry. The Queensland Government seeks a Cost– Benefit  Analysis (CBA) to assess the viability of investing in oyster farm development,  weighing financial performance against social and environmental benefits such as water filtration, biodiversity enhancement, coastal protection, and community development, to inform. future aquaculture strategies aimed at restoring a sustainable and economically valuable oyster sector.

The farm is expected to be operational by the start of 2026 and will operate for 20 years. The initial capital investment is scheduled for 2025, with additional purchases required in 2026. In your report to the Department of Primary Industries in Fisheries stakeholder, 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 assessment of biodiversity enhancement benefits within programs that aim to support local government initiatives and community wellbeing.

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

[Use the template Excel File on the BB website]

a) Market and Investor Analysis

Establishing a new oyster farm in Queensland requires a detailed investment in aquaculture infrastructure, biological inputs, and operational equipment. The proposed farm will operate on a 10- hectare estuarine lease located in a region with calm tidal waters and good nutrient flow to support oyster growth. Prior to commencing operations, the site must undergo environmental impact and water quality assessments, along with regulatory approvals required under Queensland aquaculture licensing. The environmental assessment and approval process is expected to cost $15,000, covering site surveys, sediment testing, ecological studies, and permit application fees.

The oyster production site will operate on a 10-hectare aquaculture lease, with a lease cost estimated at $1,000 per hectare per year. This investment scale reflects a medium-sized commercial operation suitable for sustainable oyster production in Queensland’s coastal waters. The investment requires 40 oyster racks at a cost of $2,000 each, 200 oyster baskets at $80 each, 10 longlines priced at $1,500 each, and 20 floating pontoons costing $2,800 each. To support these structures, the farm will install 100 metres of rope per floating pontoon at $3 per metre, 100 floats at $25 each, 300 grow-out cages priced at $100 each, and 20 anchoring systems costing $600 each. These inputs form the core physical framework for cultivating oysters through to harvest, ensuring stability against currents and storms while maintaining water flow and food availability.

This level of infrastructure investment represents a moderate-scale commercial development capable of producing around 300,000 to 400,000 market-size oysters  per year, depending on survival and environmental conditions.  The farm will also require investment in biological stock and onshore facilities to enable the first production cycle. Each year, 500,000 oysters spat will be purchased from hatcheries producing disease-resistant species such as the Blacklip Rock Oyster. Each spat costs $0.08, representing the initial biological input for the grow-out phase.

An onshore support facility will be constructed to accommodate cleaning, grading, and temporary storage of harvested oysters before distribution. This facility will include a refrigeration unit costing $12,000, cleaning and grading machinery costing $7,500, and essential tools and safety equipment valued at $2,500. Two small aluminium workboats will be purchased at $27,000 each to manage farm maintenance, oyster deployment, and harvesting, along with one boat trailer costing $4,500 and safety and navigation equipment valued at $2,350. Fuel storage facilities, maintenance tools, and spare parts will also be required to ensure smooth operations and compliance with maritime safety standards.

Fuel storage facilities, maintenance tools, and spare  parts will also be required to ensure smooth operations and compliance with maritime safety standards. The farm will require a bunded 2,000-litre diesel storage tank at a cost of $6,400, along with pumps, hoses, and spill safety equipment costing $1,200. An initial fill of 500 litres of diesel will be purchased at a price of $1.90 per litre to support the establishment phase, including installation work, equipment testing, and initial transport runs.

For a 10-hectare oyster farm, the expected annual fuel consumption during normal operations is approximately 2,500 litres per year, reflecting daily boat trips for farm inspection, maintenance, oyster deployment, and harvest activities. This consumption estimate assumes moderate travel distances to the onshore facility and local market distribution.

In 2026, additional investment will be required to complete setup and commence the first full production cycle. The additional purchases in 2026 include:

i.       Refrigeration unit for onshore facility: $12,000.

ii.       Cleaning and grading machinery: $7,500.

iii.       Safety and navigation equipment for workboats: $2,350.

iv.       Boat trailer: $4,500.

As part of the project, the farm will need to invest in working capital in 2026 to assist in maintenance of the facilities. The working capital items have been provided in Table 1.

Table 1: Working Capital

In addition to the working capital, the farm expects the following operating costs including annual replacement of some initial inputs:

Table 2: Operating Costs

Labour and regulatory costs represent another major component of the initial investment. The farm will employ two full-time farmhands, each earning $80,000 per year, and a part-time supervisor earning $45,000 per year, to oversee daily operations and ensure compliance with aquaculture protocols. Additional labour will be required for installation and seeding activities, equivalent to 400 hours of casual work at $35 per hour. Licensing and environmental compliance will cost approximately $8,000, covering aquaculture permits, water quality monitoring, and occupational safety certification per year.

To safeguard the business against operational risks, insurance covering infrastructure, vessels, and environmental liability will be required at 4 percent of the total initial investment. This comprehensive set of capital and operational inputs provides the foundation for assessing the project’s economic feasibility and calculating the expected financial and social returns of oyster farming in Queensland.

To calculate revenue, each production cycle spans approximately two years, during which oysters are grown from juvenile spat to market size under estuarine conditions. It is expected that around 70 percent of the 500,000 oysters stocked each cycle will survive to harvest, reaching saleable size and quality. The market price for harvested oysters is estimated at $1.20 per oyster, representing the average farm-gate price for premium tropical oysters in Queensland.

To finance the initial investment costs, the farm requires a loan of $200,000 at an interest rate of 4.5% per annum. The loan will have a 12-year term with repayments starting from 2026. Additionally, in 2028 the farm will take out a balloon loan of $80,000 as a contingency for any unexpected costs. This loan will have a term of 4 years with repayments starting in 2029 and an interest rate of 9% per annum. The balloon payment is 25% of the initial loan paid in the final year. Both loans are from foreign banks.

Table 3: Depreciation

*Note that all additional purchases in 2026 can be depreciated in the same year of purchase.

The tax rate on profits is 25%. Assume the salvage value for all investment costs is 5% of the initial fixed investment cost plus 5% of the additional investment cost (for capital purchased in year 2026).

Assume the farm operates at two different capacity levels:

-     Operating capacity starts at 50% in Year 1 and reaches 100% in Year 2.

-     Revenue capacity is expected to be 0% in Year 1, 50% in Year 2, and 100% in Year 3.

Using a conversion factor of 1,000 and the information above, you have been asked to calculate the following:

i)    The IRR and NPV for the Market Analysis at a 5%, 7% and 10% real discount rate.

ii)   The  IRR on equity and NPV for the business at a 5%, 7% and 10% 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.

As we observe taxes and subsidies only on inputs in this project, we assume that inputs represent additional quantities supplied (not diverted from other uses). It is also noted that coastal site has an opportunity cost of $0 and the opportunity cost of casual labour is 60% of the market wage for casual workers. All other workers are employed from elsewhere and should be costed at the market wage.

To estimate the external benefits and costs of the proposed oyster farm development, several key environmental and social factors have been considered to reflect improvements in ecosystem services, coastal protection, and community wellbeing, as well as the potential negative externalities associated with aquaculture operations.

(1) Biodiversity and Fish Habitat Enhancement

The oyster farm structures provide important habitat for fish, crabs, and invertebrates, enhancing biodiversity and local ecosystem productivity. The ecological value of this habitat improvement is estimated at $1,500 per hectare per year, and it is assumed that 80 percent of the total 10-hectare site is allocated to offshore production areas.

(2) Coastal Protection and Erosion Control

Oyster reefs and farm structures play a vital role in reducing wave energy, stabilising sediments, and protecting coastal areas from erosion. This natural service prevents damage that would otherwise require costly artificial protection or maintenance works. The value of this benefit can be estimated by assuming that 200 metres of shoreline are protected by the oyster farm, with an avoided maintenance cost of $120 per metre per year.

(3) Carbon Storage and Climate Regulation

Oysters sequester carbon naturally through the process of shell formation.  Each  harvested oyster contains approximately 20 grams of calcium carbonate (CaCO₃), of which 12 percent is carbon. This amount of carbon is converted to its carbon dioxide equivalent using a conversion factor of 3.67, giving an estimated 8.8 grams of CO₂e per oyster. The total annual carbon captured can be calculated by multiplying 8.8 grams by the number of oysters harvested per production cycle and then converting the result from grams to tonnes. This figure represents the total amount of carbon dioxide equivalent sequestered by the oyster farm each year through  shell formation.  Hint:  You are required to do research to find the carbon price.

(4) Amenity Loss

The visibility of oyster farming structures and restricted waterway access may reduce visual amenity and recreational use in nearby areas. Assume that 300 local households experience a small reduction in amenity, valued at $30  per  household  per year. The  annual  social cost of amenity  loss can  be estimated by multiplying the number of affected households by the per-household value.

These costs and  benefits highlight the broader social value of the oyster farm beyond private profitability, particularly in supporting ecosystem health, climate mitigation, and regional coastal resilience, while also recognising potential environmental and social trade-offs.

i)            Building on the spreadsheet completed in a), calculate the NPV and IRR of the Social Cost Benefit Analysis using a 5%, 7% and 10% real discount rate.

c)    Disaggregated Social Analysis

Now you want to disaggregate 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, the community, 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%, 7% and 10% real discount rate.

ii)           The NPV for each remaining stakeholder group using a 5%, 7% and 10% real discount rate.

d) Sensitivity Analysis

Now as  part of the cost-benefit analysis, the  Fisheries  Department  is  interested  in evaluating the assumptions and how sensitive or insensitive the results are to the best guess inputs. Specifically, the Fisheries Department would like to answer the following questions:

i)            There are two key inputs that are uncertain in estimating the revenue of the oyster farm

– the survival rate and the price per oyster. As these are two factors that the farm has some control over, the analysis will assess how the NPV changes for the investor at a 5% discount rate. The price per oyster should vary by 30 cents from the best estimate, and the survival rate should vary by 15% from the best estimate. Comment on the results.

ii)           The Fisheries Department would like to identify the full market price per oyster required for the project to achieve a breakeven NPV at a 7% discount rate. Use the “Goal Seek” function to determine the minimum price per oyster that would allow the investment to just break even. Then, assess how this breakeven price would change if the survival rate of oysters decreased to 60%.

Part 2 - Written Report Group Task - 30 marks (15%)

Using your results from Part 1 of the case study, write a comprehensive report analysing the results of your CBA. In your report ensure you:

1)    Provide professional recommendations to the Fisheries Department on whether the proposed oyster farm investment should proceed. Your recommendations should be supported by clear evidence drawn from your analysis, including both financial and social perspectives. You are also expected to review relevant literature on sustainable aquaculture and ecosystem service valuation to justify your recommendations.

2)    Outline the approach and results of sections a) to d) in Part 1. In your response you should investigate which variables should be subject to a partial sensitivity analysis in addition to the results of d).

3)    Identify considerations for your analysis or any alternative approaches that would improve on the current format of the CBA.

Word limit 1,500 words (+/- 10 %).

The rubric for this component of the case study can be found on the course website.

Part 3 - Reflective Assessment Individual Task - 20 marks (10%)

Critically reflect on the CBA task from the Case Study. In your answer,

1)    determine and establish the relevance and authenticity of the case study task as part of your

development in a professional context.

2)    reflect on your individual challenges or challenges faced as part of a group.

Word limit 750 words.

The rubric for this component of the case study can be found on the course website.