Freemark Abbey

Decision Problem:

Should Mr. Jaeger harvest before the storm or later?

Alternatives:

A. If the decision is to harvest before the storm, the revenue is about $34,200 with certainty.
B. Ifthe decision is to harvest after the storm, the outcome may vary depending on whether storm will hit the Napa Valley, and whether the botrytis mold will form if the storm does strike.
a. There is a 50%likelihood that the storm strikes, with two possible sub-scenarios.
- The humidity could cause with 40% probability the grapes to be attacked by a beneficial mold, increasing the quality of thewine.
The EMV is $26,880 =$8 (12,000bottles*70%)*40%.
If the storm comes and the mold occurs, then bottle the wine and sell to wholesalers at an expected price of $8/bottle, taking into account thatyou’ll sell 30% fewer bottles due to the mold.
- The storm could damage the grapes with 60% probability resulting in a poor quality wine. In this case, the company could either bottle the wine orsell the wine in bulk (or just grapes).
If the storm comes and the mold doesn’t form, then bottle the wine at $2/bottle wholesale and hope that the inferior wine does not negatively affect yourvineyards’ reputation in a significant way. EMV would be $14,400 = $2 (12,000 bottles* 60%)
But if they sell the wine in bulk or just grapes EMV would be $7,200. (i.e. $1*12,000 bottles*60%).
Note: Theoption of selling in bulk avoids damaging the winery’s reputation. However, Riesling only represents less than four percent of total production. Bottling the wine recovers twice as much value as sellingin bulk.
The total EMV if storm strikes $41,280 = ($26,880+$14,400)
b. It is equal likely that the storm does not strike. There are three possible sub-scenarios depending on the weathercondition.
- Good weather with 40% probability
EMV would be $16,800 = $3.5 (12,000 bottles*40%)
- Less favorable weather with 40% probability
EMV would be $14,400 =$3 (12,000bottles*40%)
- Dip in...