Answer:
a. PV of one year future net benefit is $2,126,168.22
b. The PV of now is $2,600,000
c. The difference between the two PVs is $473,831.78.
d. It is better to release the vintage of sauvignon blanc now.
Explanation:
a. What is the present value of the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year?
Benefit in one year = $2,600,000 + ($2,600,000 × 25%) = $3,250,000
Cost in one year = $975,000
Net Benefit in one year = Benefit in one year - Cost in one year
Net Benefit in one year = $3,250,000 - $975,000 = $2,275,000
Present value (PV) = $2,275,000 ÷ (1.07^1) = $2,126,168.22
b. What is the present value if he releases the wine now
The present value is $2,600,000
c. Difference between the two PVs
Difference = PV of b - PV of a = $2,600,000 - $2,126,168.22 = $473,831.78.
d. Decision
Since the PV of releasing the vintage of sauvignon blanc is $473,831.78 higher than the PV of releasing it in a year, it is better to release it now.
