Valuing a Texas Vineyard

DCF model

Build a DCF model to determine the present value of the vineyard.

You have been asked by an entrepreneur to value a potential vineyard in the Texas Hill Country,

an area west of Austin, Texas, USA. The cost of establishing a vineyard is reported in Table $1$

below. The cost of operating a vineyard is given in Table $2$ below. The current price of the

relevant grapes is $$1,\frac{500}{t}n.$ Historically, grape prices have grown on average by $3\mathrm{.}5\%$ per year

and the standard deviation of the log$-$returns on Texas grapes has, historically, been $10\%.$ Your

client uses a WACC of $12\%$ for similar projects but is unsure whether this would be an

appropriate RADR for this project. The land that your client is thinking of purchasing has a yield

of $4$ tons of grapes per acre. Yields are not expected until $3$ years after the land has started to be

cultivated. Capital expenditure is depreciated linearly over $10$ years, and the corporate tax rate

is $37\mathrm{.}5\%.$ You are asked to advise on the optimal time to invest in a winery.

Table $1$: Required investment to establish a vineyard $($$$/$acre$)$

Table $2$: Average Annual Operating Costs $($$$/$acre$)$Valuing a Texas Vineyard

DCF model

Build a DCF model to determine the present value of the vineyard.

You have been asked by an entrepreneur to value a potential vineyard in the Texas Hill Country, an area west of Austin, Texas, USA. The cost of establishing a vineyard is reported in Table $1$ below. The cost of operating a vineyard is given in Table $2$ below. The current price of the relevant grapes is $$1,500/$tn$.$ Historically, grape prices have grown on average by $3\mathrm{.}5\%$ per year and the standard deviation of the log$-$returns on Texas grapes has, historically, been $10\%.$ Your client uses a WACC of $12\%$ for similar projects but is unsure whether this would be an appropriate RADR for this project. The land that your client is thinking of purchasing has a yield of $4$ tons of grapes per acre. Yields are not expected until $3$ years after the land has started to be cultivated. Capital expenditure is depreciated linearly over $10$ years, and the corporate tax rate is $37\mathrm{.}5\%.$ You are asked to advise on the optimal time to invest in a winery.

Table $1$: Required investment to establish a vineyard $($$$/$acre$)$

Item Year $1$ Year $2$ Year $3$

Land purchase $2,500$

Equipment $2,000$

Site preparation & planting $4,400$

Trellis construction $3,500$

Drip irrigation & install $1,300$

Cultural practices $1,8001,8001,800$

Table $2$: Average Annual Operating Costs $($$$/$acre$)$

Item Cost

Chemical cost $622$

Labour $2,500$

Harvesting $300$

Maintenance$/$repairs $424$

Irrigation$/$fuel $113$