6) Wayne Gretzky Winery is a producer of top-quality Ice wine. Their current annual demand is 5,000 bottles per year, and their winery is operating at full capacity. The Winery's forecast estimates that annual demand will increase by 50% next year to 7,500 with a probability of 0.3; remain at the current level with a probability of 0.4; and decrease by 30% to 3,500 with a probability of 0.3.

The production cost of each bottle of Ice wine is 15 dollars, and they sell the Ice wine at 25 dollars per bottle. Assuming they retain current production capacity, what is Wayne Gretzky Winery’s E(NPV) for next year? [Without any CapEx, this equals next year's E(Operating Profit).]

7) Assume now that Wayne Gretzky Winery are given two options:

A: Capacity Expansion: add 5,000 units of capacity and incur a fixed cost of 5,000 dollars.

B: Outsource: outsource to a different winery only when the demand exceeds the current capacity. In this case, Wayne Gretzky Winery purchases from other winery at 20 dollars per bottle.

C) Please draw and upload the Winery's decision tree.

8) Continuing the previous question:

What is the E(NPV) of the optimal option in the previous question?

9) Assume now that the capacity lead-time of the Winery is very small so that it can postpone the "expand or outsource" decision until it observes next year's demand: What is the optimal strategy in each of the three scenarios? What is the ENPV of the optimal postponed strategy?

Answer rating: 100% (QA)

6 ENPV 75000325 50000425 35000325 50000315 50000415 35000315 7875 2250 1125 4500 7 See attached 8 ... View the full answer