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 $2.4 million. If it is barrel aged for a further​ year, it will be worth 25​% ​more, though there will be additional costs of $840,000 incurred at the end of the year. If the interest rate is​ 7%, 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 or if he releases the wine​ now?
A. He will earn $336,000 more if he releases the wine now.

B. He will earn ​$ 381,308 more if he releases the wine now.

C. He will earn $2,400,000 less if he releases the wine now.

D. He will earn $240,000 less if he releases the wine now.

Answer 1

Answer:

Option B is correct (he will earn ​$ 381,308 more if he releases the wine now.)

Explanation:

Option B is correct (he will earn ​$ 381,308 more if he releases the wine now.)

Worth of wine=$2,400,000

Increase in  worth of wine after one year=$2,400,000*0.25

Increase in  worth of wine after one year=$600,000

After one year new worth of wine=$600,000+$2,400,000

After one year new worth of wine=$3,000,000

Amount Received at the end of year=$3,000,000-$840,000

Amount Received at the end of year=$2,160,000

Present Value=$2,160,000/(1+0.07)

Present Value=$2018691.589

Earning=$2,400,000-$2018691.589

Earning=$381308.411≅$381,308

It means he will earn ​$ 381,308 more if he releases the wine now.