Francis Ford Coppola hobby has always been wine making. When he had the opportunity, he purchased five acres plus an option to buy 35 additional acres of land in Napa Valley. His plans are to grow its own grapes and make wine with them. Because wine making is capital-intensive and because growing commercial-quality grapes with full yield of five tons per acre takes at least eight years, Francis wants to start small. This is necessitated by his inexperience in wine making on a large scale. His plan is first to plant the grapes on his land to get the vines started. To help maintaining a positive cash flow during the first few years, he also plans to buy grapes from other nearby growers so he can make his own label wine. He proposes to market it through a small tasting room that he will build on his land and keep open on weekends during the spring-summer season. To begin, Francis is going to use $10,000 to finance the initial purchase of grapes from which he will make his first batch of wine. He is also thinking of going to the bank and asking for a loan. He knows that if he goes to the bank, the loan officer will ask for a business plan; so he is trying to pull together some numbers for himself first. This way he will have a rough notion of the profitability and cash flows associated with his ideas before he develops a formal plan with a pro forma income statement and balance sheet. He decided to make the preliminary planning horizon two years and would like to estimate the profit over that period. His most immediate task is to decide how much of the $10,000 should be allocated to purchasing grapes for the first year and how much to purchasing grapes for the second year. 

In addition, each year he must decide how much he should allocate to purchasing grapes to make his favorite Pinot Noir and how much to purchasing grapes to make the more popular Riesling that seems to have been capturing the attention of a wider market in the last few years. In the first year, each bottle of Pinot Noir requires $0.80 worth of grapes and each bottle of Riesling uses $0.70 worth of grapes. For the second year, the costs of the grapes per bottle are $0.75 and $0.85, respectively. Francis anticipates that his Pinot Noir will sell for $8 a bottle in the first year and for $8.25 in the second year, while his Riesling’s price remains the same in both years at $7 a bottle. Besides the decisions about the amounts of grapes purchased in the two years, Francis must make estimates of the sales levels for the two wines during the two years. The local wine-making association has told him that marketing is the key to success in any wine business; generally, demand is directly proportional to the amount of effort spent on marketing. 

Thus, since Francis cannot afford to do any market research about sales levels due to his lack of capital, he is pondering how much money he should spend to promote each wine each year. The wine-making association has given him a rule of thumb that relates estimated demand to the amount of money spent on advertising. For instance, they estimate that each dollar spent in the first year promoting Pinot Noir, a demand for five bottles will be created; and for each dollar spent in the second year, a demand for six bottles will result. Similarly, for each dollar spent on advertising for the Riesling in the first year, up to eight bottles can be sold; and for each dollar spent in the second year, up to ten bottles can be sold. The initial funds for the advertising will come from the $10,000 available. Assume that the cash earned from wine sales in the first year is available in the second year. A personal concern Francis has is that he maintain a proper balance of wine products so that he will be well positioned to expand his marketing capabilities. Thus, in his mind it is important to ensure that the number of bottles of Pinot Noir sold each year falls in the range between 40% and 70% of the overall number of bottles sold. 

1. Francis needs help to decide how to allocate his budget between the decisions that needs to be made in the two-year period and how much profit he should expect to have available for possible future investments. 

2. After showing the business plan to the bank, Francis learns that the loan officer is concerned about the market prices used in estimating the profits – recently it has been forecasted that Argentina and Australia will be entering the American market with high-quality, low-priced white wines. In particular, the loan officer estimates that the price used for the Riesling in the second year is highly speculative and realistically might be only half the price Francis calculated estimated price. Thus, the bank is nervous about lending the money because of the big effect such decrease in price might have on estimated profits. Another comment the loan officer of the bank has after reviewing the business plan is that Francis is allowing for carryover of inventory of unsold wine from the first year to the second, but no costs are associated. If the holding costs are $0.10 per bottle per year, how much Francis’s plan changes? What do you think about the bank concerns? 

3. What other things might Francis need to take into consideration into his business plans to increase the probability to be approved for a loan by the bank?