The Cessna Caravan was used for a pilot type endorsement training and departed Cairns at 15:37. Following some upper level air work, the crew requested, and were granted a clearance for, a simulated engine failure and descent to 2,000 ft. The pilot in command retarded the power lever to the flight idle stop and the fuel condition lever to the low idle range, setting a value of 55% engine gas generator speed (Ng). The pilot under training then set the glide attitude at the best glide speed of about 79 knots indicated airspeed and feather the propeller The PIC reported that he instructed the pilot under training to advance the emergency power lever (EPL) to simulate manual introduction of fuel to the engine. He then noticed that there was no engine torque increase, with the engine inter-turbine temperature (ITT or T5) and Ng rapidly decreasing, and a strong smell of fuel in the cockpit. Despite several efforts to relight the engine, they were not successful. They then completed a successful landing in a depth of about 2 m of water near Green Island. The aircraft sustained minor damage during the ditching, but subsequent substantial damage due to salt water immersion. SIGNIFICANT FACTORS: 1. The pilots of CYC were conducting in-flight familiarization training using the emergency power lever. That procedure was not contained in the aircraft manufacturer’s pilot operating handbook. 2. The engine manufacturer’s documentation contained information on the use of the emergency power lever, which did not preclude the use of the emergency power lever for in-flight familiarization training. 3. The engine sustained a flameout at an altitude above mean sea level from which reignition of the engine was not successfully completed. 4. Erosion of the first-stage compressor blades would have reduced the aerodynamic efficiency of the compressor blades.