Freemark abbey winery

Analysis of the Harvest Decision

If the decision is to harvest before the storm, the revenue is about $34,200 with certainty.

If the decision is to harvest after the storm, the outcome may varydepending on whether storm will hit the Napa Valley, and whether the botrytis mold will form if the storm does strike.
• There is a 50% likelihood that the storm strikes, with two possiblesub-scenarios.
- The humidity could cause with 40% probability the grapes to be attacked by a beneficial mold, increasing the quality of the wine. The EMV is $26,880 =$8(12,000bottles*70%)*40%.
- The stormcould damage the grapes (probability: 60%) resulting in a poor quality wine. In this case, the company could either bottle the wine (EMV: $14,400 =$2*12,000bottles*60%), or sell the wine in bulk (orjust grapes) (EMV: $7,200 =$1*12,000bottles*60%). Note: The option of selling in bulk avoids damaging the winery’s reputation. However, Riesling only represents less than four percent of totalproduction. Bottling the wine recovers twice as much value as selling in bulk.
EMV if storm strikes $41,280 =($26,880+$14,400)
• It is equal likely that the storm does not strike. There are threepossible sub-scenarios depending on the weather condition.
- Good weather (probability: 40%): EMV= $16,800 =$3.5*12,000bottles*40%
- Less favorable weather (probability: 40%): EMV= $14,400=$3*12,000bottles*40%
- Dip in acidity (probability: 20%): EMV= $6,000 =$2.5*12,000bottles*20%
EMV if storm does not strike $37,200 =($16,800+$14,400+$6,000)
The total EMV of harvesting after the storm is$39,240 =$41,280*50%+$37,200*50%.

Recommendation

The expected value of harvesting afterward is higher by $ 5,040 =$39,240-$34,200. The winery should not harvest the grapes right now because theyshould realize more value if they wait. Furthermore, analyzing the distribution of revenues will help the winery reach the same conclusion because it is more likely (60%) to earn above $ 34,200 if...