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?

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Business

Dennis Donovan

18 November, 01:19

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?

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Milo Bush · Answer 1

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