Question

A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?

Answer 1

Answer:

The difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now is $ 328,972

Explanation:

According to the given data we have the following:

Value if the wine is released now = $2.2 m = $2,200,000

Value of the wine after 1 year = $2,200,000×1.15%= $2,530,000

Additional Cost = $528,000

Interest Rate = 7%

Hence, Value of the wine now =($2,530,000- $528,000) / (1+0.07)

Value of the wine now =$1,871,028

Therefore, The  difference = $2,200,000 -$1,871,028

The  difference =$328,972

The difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now is $ 328,972