Mackmyra Whisky AB needs additional funds for further expansion. The problem with their business of producing and

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Question:

Mackmyra Whisky AB needs additional funds for further expansion. The problem with their business of producing and selling whisky is a long cash conversion cycle, which means that cash comes in only 9, 12 or 15 years after production due to the long storage time of the whisky in oak barrels.

Mackmyra AB considers to take a loan of 30 million SEK for the expansion at a borrowing rate of 3%. However, Mackmyra's new CFO, a former JIBS student, proposes to sell 30-liter whisky barrels in advance to customers right after production. (Customers would take care themselves regarding the storage of their whisky barrels for some years until the whisky is bottlened and ready for consumption.) However, the price of a freshly distilled whisky barrel (called a zero-year barrel) is lower than those of 9, 12 or 15 years old barrels. The CFO estimates that Mackmyra could sell the zero-year barrel at a price of 17750 kr. Currently, 9-year barrels are sold at a price of 25000 kr, 12-year barrels are sold at a price of 28500 kr and 15-year barrels are sold at a price of 31000 kr. (For the sake of simplicity, we assume that there won't be price changes for the barrels in the coming years.)

a.) Calculate the NPV of this proposal. Assumption: From three produced whisky barrels, one is sold as 9-year, one is sold as 12-year, and the third one is sold as a 15-year barrel.

(Hint: assume that selling three zero-year barrels implies to loose the income from selling them as 9-, 12-, and 15-year barrel later on.)

b.) At which price of the zero-year barrel is Mackmyra indifferent between taking a loan or selling the zero-year barrels? (or to put it differently, at which price of the zero-year barrel do we have a break-even?)

c.) Consider now the perspective of an investor who is interested to buy zero-year barrels at a price of 17750 kr. What is the IRR of buying three zero-year barrels and keeping them until 9, 12 and 15 years respectively, and to sell them in those years at the prices stated above? (We assume again that prices do not change and that the investor has no storage costs.)

d) If the investor has an opportunity cost of capital of 3%, should she buy the zero-year barrel at a price of 17750 kr?