As a storm approaches, Mr. Jaeger must evaluate the risk of harvesting his Riesling grapes immediately or holding off and taking the chance the grapes become thin or produce no mold and sell at a lower price. Mr. Jaeger must evaluate the risk and the expected revenues related to his different options. The recommendation is that Mr. Jaeger should not harvest the Riesling grapes right now but wait for a better profit given by the possibility of an upcoming rainstorm that may prove to produce a botrytis mold proved to produce a more complex and greater revenue generating wine.
It is important for Mr. Jaeger to review the alternatives that are presented in this particular situation. Mr. Jaeger has a few options that are presented that he may be able to use throughout his analysis process. Mr. Jaeger’s main alternatives are weather to Harvest his grapes now and take revenue that is guaranteed or wait to harvest and wait for rainfall that may provide greater revenues for some situations that may occur. Another option Mr. Jaeger is faced with is selling his grapes at 50% of their value in order to prevent his business from developing a poor reputation amongst wine purchasers.
Some very critical uncertainties that Mr. Jaeger faces is whether or not a rain storm will come as well as, will the rainstorm cause mild to grow on the Riesling grapes and produce the botrytis mold that allows Mr. Jaeger to sell his wine at $8.00 a bottle significantly more than the $2.85 he would sell each bottle for if he choose to harvest now. Mr. Jaeger’s main objective is to maximize net cash flow while preventing a loss of reputation to his winery.
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The decision tree (see attached exhibit) offers two options for Mr. Jaeger. Option 1 is to harvest immediately. If Mr. Jaeger does decide to harvest immediately, his per bottle revenue will come out to $2.85 wholesale. With 12,000 bottles sold, Mr. Jaeger will generate a revenue of $34,200 to Freemark Abbey Winery. Option 2, is much more complicated, in that it considers the probabilities of multiple events. A determination must be made of what will happen if there is a storm, or if there is no storm that occurs. In order to compare the options, a calculation of the expected value is made to analyze the outcomes of different events. There are two main events that affect waiting on the Reisling grape, and passing on harvesting immediately, rainstorm or no rainstorm.
There is a 40% chance that a favorable result occurs and a storm helps produce the botrytis mold on each of the grapes. In doing so, the cost per bottle is able to sell at $8.00 per bottle wholesale, generating revenues of $67,200. The botrytis mold reduces the amount of juice of each grape and reduces the amount of bottles that are able to be produced, in turn, a higher wholesale price is charged and only 8,400 bottles are produced. This option provides the highest amount of revenue that Mr. Jaeger is able to make.
There is also a 60% probability that the vineyard is ruined by the storm, and no mold grows on the grapes. Mr. Jaeger sells the wine at either $2.00 a bottle at this point or accepts a 50% reduction in the grapes and sells those directly to another vineyard to preserve the company’s reputation as a winery. If the “no mold” wine is descent enough to harvest at that point and sell, revenue can be made of $25,800. If no rainstorm occurs, Mr. Jaeger has a 40% probability of achieving a selling price of $3.50 if the grapes retain 25% sugar, 40% probability of achieving a selling price of $3.00 if they reach 20% sugar content or $2.50 a bottle if the sugar content is below 20%.
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Budgets are significant in the budget formulation process. Budgeting as a tool is the make-up of public policy (Smith & Lynch, 2004). Budgets exist at all levels of government, local, state, and federal. When describing revenue sources in public budgeting, it is important to describe the source of revenue, the source of the funding, importance of informed financial decisions, financial ...
In reviewing the scenarios the expected monetary value proved to support waiting on harvesting the Riesling grape. By waiting, Mr. Jaeger incurs an EMV of $39,780 for his grapes. If he chooses to harvest, his EMV will be a guaranteed $34,200. The difference here is that the option of waiting to harvest poses 2 scenarios where the risk would prove to provide Mr. Jaeger with a lower revenue than the guaranteed $34,200. If no mold appears he is able to sell the wine at $25,800 OR sell the grapes at 50% of that value to persevere his reputation. If no storm occurs, and the grapes produce less than 20% sugar content, Mr. Jaeger will only be able to obtain $30,000 in revenues. In situation where no mold exists Mr. Jaeger would lose either $8,400 if he bottles or $22,200 if he chooses to sell the grapes and maintain reputation. He would lose $4,200 if no storm occurred and the grape only produced a lower than 20% sugar content.
As the future is uncertain and probabilities of events happening may change, new biases will most certainly be introduced. Mr. Jaeger should discuss events that are outside of his control with experts of those fields. Particularly the discussion of where the weather is proposed to be in the coming months.
If it is known with certainty that the storm would hit the best alternative is expected revenue of $34,200 vs. $34,080. Under the assumption that the thin wine must be sold in bulk for 50% of the value at $12,000, if it is clear the storm would not hit than it is better to wait and attain EMV of $37,200 vs. $34,200. With prior knowledge the EMV would be (.5)(34,200)+(.5)(37,200) = $35,700. Without any prior knowledge the EMV is $35,640. Having the prior knowledge provides an expected value of $60 ($35,700 – $35,640).