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<br />MWSI Project <br />Interruptible Supply Framework Repon - DRAFT <br /> <br />August 21. 1995 <br /> <br />Using the values above, it was determined that the maximum price that a city <br />could afford to pay a fanner to hold an option contract is $295 / AF. Under this base <br />case, as long as the negotiated option price is $295/ AF or less, ISC contracts are more <br />economically attractive than the direct purchase of the water right. Michelsen and <br />Young varied the values listed above to determine how sensitive present value benefits <br />were to these parameters. The results are displayed in Table 2, For most of the <br />conditions. the present value benefits are positive and significant. Two key parameters <br />are the appreciation of water right purchase costs and the discount rate - both of which <br />can be difficult to predict. <br /> <br />Table 2 <br />Present Value Benefits of an Interruptible Supply <br />Contract verses Water Right Purchase <br /> <br />(Maximum Option Price Which A Municipality Can <br />Pay and Still Benefit Over Purchasing the Water Right) <br /> <br />(1988 $/ AF) <br /> <br />. - ~... <br />,::,.,::;p,arame,ter Value,' <br />"-";:j:;""". .', " ...... <br /> <br /> <br />-'.~ , <br />li1te~tRate <br /> <br />Water:RightAppreciation <br />(percent I year) <br /> <br />Farmer Offeririg Price I ExcerciseCost <br />, ,($/AF) <br /> <br />Water Right Purchase CoSt <br />. ,($/AF) , <br /> <br />Timing of Option Excercise <br />(YearExcercised) <br /> <br />Expected Frequency <br /> <br />1:5 <br />1:10 <br />1:20 <br />1:50 <br /> <br />17 <br />151 <br />218 <br />258 <br /> <br />112 <br />234 <br />295 <br />332 <br /> <br />189 <br />301 <br />357 <br />391 <br /> <br />Hydrosphere Resource Consultants <br /> <br />19 <br />