The impact of taxes on optimal portfolio choice : an Australian study

Taxes are an important component of investing that is commonly overlooked in both the literature and in practice. For example, many understand that taxes will reduce an investment’s return, but less understood is the risk-sharing nature of taxes that also reduces the investment’s risk. This thesis examines how taxes affect the optimal asset allocation and asset location decision in an Australian environment. It advances the model of Horan & Al Zaman (2008), improving the method by which the present value of tax liabilities are calculated, by using an after-tax risk-free discount rate, and incorporating any new or reduced tax liabilities generated into its expected risk and return estimates. The asset allocation problem is examined for a range of different scenarios using Australian parameters, including different risk aversion levels, personal marginal tax rates, investment horizons, borrowing premiums, high or low inflation environments, and different starting cost bases. The findings support the Horan & Al Zaman (2008) conclusion that equities should be held in the taxable account. In fact, these findings are strengthened with most of the efficient frontier maximising equity holdings in the taxable account instead of only half. Furthermore, these findings transfer to the Australian case, where it is found that taxed Australian investors should always invest into equities first through the taxable account before investing in super. However, untaxed Australian investors should invest their equity first through superannuation. With borrowings allowed in the taxable account (no borrowing premium), Australian taxed investors should hold 100% of the superannuation account in the risk-free asset, while undertaking leverage in the taxable account to achieve the desired risk-return. Introducing a borrowing premium decreases the likelihood of holding 100% of super in the risk-free asset for taxable investors. The findings also suggest that the higher the marginal tax rate, the higher the borrowing premium in order to overcome this effect. Finally, as the investor’s marginal tax rate increases, the overall allocation to equities should increase due to the increased risk and return sharing caused by taxation, and in order to achieve the same risk/return level as the lower taxation level, the investor must take on more equity exposure. The investment horizon has a minimal impact on the optimal allocation decision in the absence of factors such as mean reversion and human capital.

Strategic project evaluation for open pit mining ventures using real options and allied econometric techniques

Open pit mine operations are complex businesses that demand a constant assessment of risk. This is because the value of a mine project is typically influenced by many underlying economic and physical uncertainties, such as metal prices, metal grades, costs, schedules, quantities, and environmental issues, among others, which are not known with much certainty at the beginning of the project. Hence, mining projects present a considerable challenge to those involved in associated investment decisions, such as the owners of the mine and other stakeholders. In general terms, when an option exists to acquire a new or operating mining project, , the owners and stock holders of the mine project need to know the value of the mining project, which is the fundamental criterion for making final decisions about going ahead with the venture capital. However, obtaining the mine project’s value is not an easy task. The reason for this is that sophisticated valuation and mine optimisation techniques, which combine advanced theories in geostatistics, statistics, engineering, economics and finance, among others, need to be used by the mine analyst or mine planner in order to assess and quantify the existing uncertainty and, consequently, the risk involved in the project investment. Furthermore, current valuation and mine optimisation techniques do not complement each other. That is valuation techniques based on real options (RO) analysis assume an expected (constant) metal grade and ore tonnage during a specified period, while mine optimisation (MO) techniques assume expected (constant) metal prices and mining costs. These assumptions are not totally correct since both sources of uncertainty—that of the orebody (metal grade and reserves of mineral), and that about the future behaviour of metal prices and mining costs—are the ones that have great impact on the value of any mining project. Consequently, the key objective of this thesis is twofold. The first objective consists of analysing and understanding the main sources of uncertainty in an open pit mining project, such as the orebody (in situ metal grade), mining costs and metal price uncertainties, and their effect on the final project value. The second objective consists of breaking down the wall of isolation between economic valuation and mine optimisation techniques in order to generate a novel open pit mine evaluation framework called the ―Integrated Valuation / Optimisation Framework (IVOF)‖. One important characteristic of this new framework is that it incorporates the RO and MO valuation techniques into a single integrated process that quantifies and describes uncertainty and risk in a mine project evaluation process, giving a more realistic estimate of the project’s value. To achieve this, novel and advanced engineering and econometric methods are used to integrate financial and geological uncertainty into dynamic risk forecasting measures. The proposed mine valuation/optimisation technique is then applied to a real gold disseminated open pit mine deposit to estimate its value in the face of orebody, mining costs and metal price uncertainties.

An analysis of holding cost impact on housing affordability in relation to midsized Greenfield residential property developments in South East Queensland

The position of housing demand and supply is not consistent. The Australian situation counters the experience demonstrated in many other parts of the world in the aftermath of the Global Financial Crisis, with residential housing prices proving particularly resilient. A seemingly inexorable housing demand remains a critical issue affecting the socio-economic landscape. Underpinned by high levels of population growth fuelled by immigration, and further buoyed by sustained historically low interest rates, increasing income levels, and increased government assistance for first home buyers, this strong housing demand level ensures problems related to housing affordability continue almost unabated. A significant, but less visible factor impacting housing affordability relates to holding costs. Although only one contributor in the housing affordability matrix, the nature and extent of holding cost impact requires elucidation: for example, the computation and methodology behind the calculation of holding costs varies widely - and in some instances completely ignored. In addition, ambiguity exists in terms of the inclusion of various elements that comprise holding costs, thereby affecting the assessment of their relative contribution. Such anomalies may be explained by considering that assessment is conducted over time in an ever-changing environment. A strong relationship with opportunity cost - in turn dependant inter alia upon prevailing inflation and / or interest rates - adds further complexity. By extending research in the general area of housing affordability, this thesis seeks to provide a detailed investigation of those elements related to holding costs specifically in the context of midsized (i.e. between 15-200 lots) greenfield residential property developments in South East Queensland. With the dimensions of holding costs and their influence over housing affordability determined, the null hypothesis H0 that holding costs are not passed on can be addressed. Arriving at these conclusions involves the development of robust economic and econometric models which seek to clarify the componentry impacts of holding cost elements. An explanatory sequential design research methodology has been adopted, whereby the compilation and analysis of quantitative data and the development of an economic model is informed by the subsequent collection and analysis of primarily qualitative data derived from surveying development related organisations. Ultimately, there are significant policy implications in relation to the framework used in Australian jurisdictions that promote, retain, or otherwise maximise, the opportunities for affordable housing.

Embedded tax liabilities and portfolio choice

his study presents an improved method of dealing with embedded tax liabilities in portfolio choice. We argue that using a risk-free discount rate is appropriate for calculating the present value of future tax liabilities. Supportive of recent research, our results found a taxation-induced preference of holding equities over bonds, and a location preference of holding equities in the taxable account and bonds in retirement accounts. These important findings contrast with traditional investment advice which suggests a greater capacity for risk in retirement accounts.

Destination brand equity for Australia : testing a model of CBBE in short haul and long haul markets

The study of destination brand performance measurement has only emerged in earnest as a field in the tourism literature since 2007. The concept of consumer-based brand equity (CBBE) is gaining favour from services marketing researchers as an alternative to the traditional ‘net-present-value of future earnings’ method of measuring brand equity. The perceptions-based CBBE model also appears suitable for examining destination brand performance, where a financial brand equity valuation on a destination marketing organisation’s (DMO) balance sheet is largely irrelevant. This is the first study to test and compare the model in both short and long haul markets. The paper reports the results of tests of a CBBE model for Australia in a traditional short haul market (New Zealand) and an emerging long haul market (Chile). The data from both samples indicated destination brand salience, brand image, and brand value are positively related to purchase intent for Australia in these two disparate markets.

The impact of the clean development mechanism (CDM) on the cost price of wind power electricity : a China study

As a renewable energy source, wind power is playing an increasingly important role in China’s electricity supply. Meanwhile, China is also the world’s largest market for Clean Development Mechanism (CDM) wind power projects. Based on the data of 27 wind power projects of Inner Mongolia registered with the Executive Board of the United Nations (EB) in 2010, this paper constructs a financial model of Net Present Value (NPV) to analyze the cost of wind power electricity. A sensitivity analysis is then conducted to examine the impact of different variables with and without Certified Emission Reduction (CER) income brought about by the CDM. It is concluded that the CDM, along with static investment and annual wind electricity production, is one of the most significant factors in promoting the development of wind power in China. Additionally, wind power is envisaged as a practical proposition for competing with thermal power if the appropriate actions identified in the paper are made.

An interactive planning and scheduling framework for optimising pits-to-crushers operations

In this paper, an interactive planning and scheduling framework are proposed for optimising operations from pits to crushers in ore mining industry. Series of theoretical and practical operations research techniques are investigated to improve the overall efficiency of mining systems due to the facts that mining managers need to tackle optimisation problems within different horizons and with different levels of detail. Under this framework, mine design planning,mine production sequencing and mine transportation scheduling models are integrated and interacted within a whole optimisation system. The proposed integrated framework could be used by mining industry for reducing equipment costs, improving the production efficiency and maximising the net present value.

Strategies and solutions for housing sustainability : building information files and performance certificates

The overall aim of this research project was to provide a broader range of value propositions (beyond upfront traditional construction costs) that could transform both the demand side and supply side of the housing industry. The project involved gathering information about how building information is created, used and communicated and classifying building information, leading to the formation of an Information Flow Chart and Stakeholder Relationship Map. These were then tested via broad housing industry focus groups and surveys. The project revealed four key relationships that appear to operate in isolation to the whole housing sector and may have significant impact on the sustainability outcomes and life cycle costs of dwellings over their life cycle. It also found that although a lot of information about individual dwellings does already exist, this information is not coordinated or inventoried in any systematic manner and that national building information files of building passports would present value to a wide range of stakeholders.

Basic finance made accessible in Excel 2007 : "the big 5, plus 2"

The basic principles and equations are developed for elementary finance, based on the concept of compound interest. The five quantities of interest in such problems are present value, future value, amount of periodic payment, number of periods and the rate of interest per period. We consider three distinct means of computing each of these five quantities in Excel 2007: (i) use of algebraic equations, (ii) by recursive schedule and the Goal Seek facility, and (iii) use of Excel's intrinsic financial functions. The paper is intended to be used as the basis for a lesson plan and contains many examples and solved problems. Comment is made regarding the relative difficulty of each approach, and a prominent theme is the systematic use of more than one method to increase student understanding and build confidence in the answer obtained. Full instructions to build each type of model are given and a complete set of examples and solutions may be downloaded (Examples.xlsx and Solutions.xlsx).

Teaching basic finance with Excel, and without pain

The five quantities of interest in elementary finance problems are present value, future value, amount of periodic payment, number of periods and the rate of compound interest per period. A recursive approach to computing each of these five quantities in a modern version of Excel, for the case of ordinary annuities, is described. The aim is to increase student understanding and build confidence in the answer obtained, and this may be achieved with only linear relationships and in cases where student knowledge of algebra is essentially zero. Annuity problems may be solved without use of logarithms and black-box intrinsic functions; these being used only as check mechanisms. The author has had success with the method at Bond University and surrounding high schools in Queensland, Australia.

Where to from Brahmans in the Northern Australian herd? Maintaining the economic benefit of earlier infusions of Bos indicus.

The economic performance of a terminal crossbreeding system based on Brahman cows and a tropically adapted composite herd were compared to a straightbred Brahman herd. All systems were targeted to meet specifications of the grass-finished Japanese market. The production system modelled represented a typical individual central Queensland integrated breeding/finishing enterprise or a northern Australian vertically integrated enterprise with separate breeding and finishing properties. Due mainly to a reduced age of turnoff of Crossbred and Composite sale animals and an improved weaning rate in the Composite herd, Crossbred and Composite herds returned a gross margin of $7 and $24 per Adult Equivalent (AE) respectively above that of the Brahman herd. The benefits of changing 25% of the existing 85% of Brahmans in the northern Australian herd to either Crossbreds or Composites over a 10-year period were also examined. With no premium for carcass quality in Crossbred and Composite sale animals, annual benefits were $16 M and $61 M for Crossbreds and Composites in 2013. The cumulative Present Value (PV) of this shift over the 10-year period was $88 M and $342 M respectively, discounted at 7%. When a 5c per kg premium for carcass quality was included, differences in annual benefits rose to $30 M and $75 M and cumulative PVs to $168 M and $421 M for Crossbreds and Composites respectively.

Wet season resting - economic insights from scenario modelling

Pasture degradation, particularly that attributable to overgrazing, is a significant problem across the northern Australian rangelands. Although grazing studies have identified the scope for wet season resting strategies to be used to rehabilitate degraded pastures, the economic outcome of these strategies has not been extensively demonstrated. An exploratory study of the prospective economic value of wet season resting is presented using an economic simulation model of a 28000 ha beef enterprise located in the Charters Towers region of north-eastern Australia to explore seven hypothetical scenarios centred on the projected performance of a wet season resting strategy. A series of 20-year simulations for a range of pasture recovery profiles, stocking capacity, animal productivity responses, beef prices and agistment options are compared with a baseline scenario of taking no action. Estimates of the net present value of the 20-year difference in total enterprise gross margins between the various resting options and the 'do nothing' option identify that wet season resting can offer a positive economic return for the range of scenarios examined, although this is contingent on the assumptions that are made concerning the trajectories of change in carrying capacity and animal productivity. Some implications for management and policy making to support the practical implementation of wet season resting strategies are discussed.

Economic case study of ABCD cane management practices in the Burdekin River Irrigation Area (BRIA) region

A case study was undertaken to determine the economic impact of a change in management class as detailed in the A, B, C and D management class framework. This document focuses on the implications of changing from D to C, C to B and B to A class management in the Burdekin River irrigation area (BRIA) and if the change is worthwhile from an economic perspective. This report provides a guide to the economic impact that may be expected when undertaking a particular change in farming practices and will ultimately lead to more informed decisions being made by key industry stakeholders. It is recognised that these management classes have certain limitations and in many cases the grouping of practices may not be reflective of the real situation. The economic case study is based on the A, B, C and D management class framework for water quality improvement developed in 2007/2008 for the Burdekin natural resource management region. The framework for the Burdekin is currently being updated to clarify some issues and incorporate new knowledge since the earlier version of the framework. However, this updated version is not yet complete and so the Paddock to Reef project has used the most current available version of the framework for the modelling and economics. As part of the project specification, sugarcane crop production data for the BRIA was provided by the APSIM model. The information obtained from the APSIM crop modelling programme included sugarcane yields and legume grain yield (legume grain yield only applies to A class management practice). Because of the complexity involved in the economic calculations, a combination of the FEAT, PiRisk and a custom made spreadsheet was used for the economic analysis. Figures calculated in the FEAT program were transferred to the custom made spreadsheet to develop a discounted cash flow analysis. The marginal cash flow differences for each farming system were simulated over a 5-year and 10-year planning horizon to determine the net present value of changing across different management practices. PiRisk was used to test uncertain parameters in the economic analysis and the potential risk associated with a change in value.

Economic case study of ABCD cane management practices in the Burdekin Delta region.

A case study was undertaken to determine the economic impact of a change in management class as detailed in the A, B, C and D management class framework. This document focuses on the implications of changing from D to C, C to B and B to A class management in the Burdekin Delta region and if the change is worthwhile from an economic perspective. This report provides a guide to the economic impact that may be expected when undertaking a particular change in farming practices and will ultimately lead to more informed decisions being made by key industry stakeholders. It is recognised that these management classes have certain limitations and in many cases the grouping of practices may not be reflective of the real situation. The economic case study is based on the A, B, C and D management class framework for water quality improvement developed in 2007/2008 for the Burdekin natural resource management region. The framework for the Burdekin is currently being updated to clarify some issues and incorporate new knowledge since the earlier version of the framework. However, this updated version is not yet complete and so the Paddock to Reef project has used the most current available version of the framework for the modelling and economics. As part of the project specification, sugarcane crop production data for the Burdekin Delta region was provided by the APSIM model. The information obtained from the APSIM crop modelling programme included sugarcane yields and legume grain yield (legume grain yield only applies to A class management practice). Because of the complexity involved in the economic calculations, a combination of the FEAT, PiRisk and a custom made spreadsheet was used for the economic analysis. Figures calculated in the FEAT program were transferred to the custom made spreadsheet to develop a discounted cash flow analysis. The marginal cash flow differences for each farming system were simulated over a 5-year and 10-year planning horizon to determine the Net Present Value of changing across different management practices. PiRisk was used to test uncertain parameters in the economic analysis and the potential risk associated with a change in value.

Economic case study of ABCD cane management practices in the Tully region

A case study was undertaken to determine the economic impact of a change in management class as detailed in the A, B, C and D management class framework. This document focuses on the implications of changing from D to C, C to B and B to A class management in the Tully region and if the change is worthwhile from an economic perspective. This report provides a guide to the economic impact that may be expected when undertaking a particular change in farming practices and will ultimately lead to more informed decisions being made by key industry stakeholders. It is recognised that these management classes have certain limitations and in many cases the grouping of practices may not be reflective of the real situation. The economic case study is based on the A, B, C and D management class framework for water quality improvement developed in 2007/2008 by the wet tropics natural resource management region. The framework for wet tropics is currently being updated to clarify some issues and incorporate new knowledge since the earlier version of the framework. However, this updated version is not yet complete and so the Paddock to Reef project has used the most current available version of the framework for the modelling and economics. As part of the project specification, sugarcane crop production data for the Tully region was provided by the APSIM model. Because of the complexity involved in the economic calculations, a combination of the FEAT, PiRisk and a custom made spreadsheet was used for the economic analysis. Figures calculated in the FEAT program were transferred to the custom made spreadsheet to develop a discounted cash flow analysis. The marginal cash flow differences for each farming system were simulated over a 5-year and 10-year planning horizon to determine the Net Present Value of changing across different management practices. PiRisk was used to test uncertain parameters in the economic analysis and the potential risk associated with a change in value.