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The Castello Soninno winery is looking for the best bottling and promotion project for its Sangiovese Grosso vineyard. It is considering bottling a new Brunello
The Castello Soninno winery is looking for the best bottling and promotion project for its Sangiovese Grosso vineyard. It is considering bottling a new Brunello di Montalcino over the course of the next years and would like to calculate the Adjusted Present Value of the venture. A new bottling unit is required, which will be financed via a loan and will be fully depreciated by the end of production, where the company will receive a taxfree subsidy for its replacement. Some older equipment will also be used, which will be also sold at the end. They have been fully depreciated but have a market value as below. The loan ends with the project but will be refinanced instantly using capital from other ongoing firm activities, leaving the debt ratio unchanged. Depreciation is straightline, the firm has other profitable activities, the debt ratio is common and constant for the project and the firm and all cash flows occur at the end of the year.
The project specification is as follows:
Project duration: years, YYtoday is the last day of Year
Production volume: bottles per annum pa
Price per bottle: EUR today constant in real terms for the project's duration Bottling machinery: EUR, subsidy
Labour costs: real pa increase real pa
Cultivation costs petrol fertilisers etc: real pa increase real pa
Old equipment value: nominal current, real sale
Tax rate: Required return on equity: Bank lending rate: nominal Inflation: Target debt ratio:
Calculate the project's APV using nominal cash flows
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