Freemark Abbey Winery

Case Analysis

Contents
FREEMARK ABBEY WINERY........................................................................................................................... 1
CASE ANALYSIS............................................................................................................................................. 1
DATA CAPTURED..................................................................................................................................... 3
SOLUTION:................................................................................................................................................ 3
1. ASSUMING MR. JAEGER CHOOSES TO HARVEST THE RIESLING GRAPES BEFORE THE
STORM ARRIVES, HOW MUCH MONEY WILL HE MAKE?...............................................................3
2. ASSUMING MR. JAEGER CHOOSES TO LEAVE THE GRAPES ON THE VINE, WHAT IS
THE PROBABILITY THAT THE GRAPES WILL END UP WITH BOTRYTIS, AND HOW MUCH
MONEY WILL HE MAKE IF THAT OCCURS?......................................................................................4
3. TAKING ACCOUNT OF ALL THE VARIOUS POSSIBILITIES, WHAT SHOULD MR. JAEGER
DO? 5
4. HOW MUCH SHOULD MR. JAEGER BE WILLING TO PAY TO LEARN WHETHER THE
STORM REALLY WILL HIT THE NAPA VALLEY?..............................................................................7
5. HOW MUCH SHOULD MR. JAEGER BE WILLING TO PAY TO LEARN WHETHER
BOTRYTIS WOULD FORM IF THE STORM WERE TO HIT THE NAPA VALLEY?..........................8

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Data Captured
Total cases bottled each year: 25000 cases
Case size: 12 bottles
Names of wines bottled: Cabernet Sauvignon, Chardonnay, Riesling, Petite Syrah.
Number of cases of Riesling bottled each year: 1000 cases
Price obtained for wine from diluted grapes: $2.00 / bottle
Price obtained for wine from un-ripe grapes: $2.85 / bottle
Price obtained for wine from 25% sugar concentration: $3.50 / bottle
Price obtained for wine from 20% sugar concentration: $3.00 / bottle
Price obtained for wine when botrytis occurs: $8.00 / bottle
Probability of storm: 0.5
Probability of botrytis given storm: 0.4
Probability of wine from 0.7% acidity concentrated grapes given no storm: 0.2

Solution:

1. Assuming Mr. Jaeger chooses to harvest the Riesling grapes

before the storm arrives, how much money will he make?

Money made by harvesting before storm:

Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Total bottles: 1000 * 12 = 12000
Price obtained for wine from un-ripe grapes: $2.85 / bottle

Money Mr Jaeger will make by harvesting without waiting from storm:

12000 * 2.85 = $34200

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 2. Assuming Mr. Jaeger chooses to leave the grapes on the
vine, what is the probability that the grapes will end up with
botrytis, and how much money will he make if that occurs?

Probability of botrytis given storm: 0.4

The occurrence of storm and occurrence of botrytis are independent events, as the
probability of occurrence of storm doesn’t give any information about probability of
occurrence of botrytis.
So,
Probability of botrytis = Probability of botrytis given storm
Probability of botrytis: 0.4
Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Percentage of cases when botrytis occurs: 70%
Total bottles: (70 * 1000 * 12) / 100 = 8400
Price obtained for wine when botrytis occurs: $8.00 / bottle

Money Mr Jaeger will make by harvesting without waiting from storm &
if botrytis occur: 8400 * 8.00 = $67200

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 3. Taking account of all the various possibilities, what should
Mr. Jaeger do?

As shown above,
Money made by harvesting before storm: $34200
Money made if storm occurs and botrytis occurs: $67200
If storm occurs and botrytis doesn’t occur then,
Probability of botrytis: 0.4
Probability of no botrytis: 1 – 0.4 = 0.6
Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Total bottles: 1000 * 12 = 12000
Price obtained for wine from diluted grapes: $2.00 / bottle
Money Mr. Jaeger will make when storm occurs but no botrytis:
12000 * 2.00 = $24000
Expected Money when storm occurs: (0.4) * (67200) + (0.6) * (24000) = $41280
If Storm didn’t occur,
Probability of wine from 0.7% acidity concentrated grapes given no storm: 0.2
The non-occurrence of storm and low-quality grapes (less concentration of sugar) are
independent event as the probability of non-occurrence of storm will not give any
information leading to low quality grapes.
Similarly, the event of brewing wine from wine from 25% sugar concentrated grapes
and 25% sugar concentrated grapes are also independent of non-occurrence of rain.
So, Probability of wine from 0.7% acidity concentrated grapes: 0.2
Sum of probability of wine from 25% sugar concentrated grapes or probability of
wine from 20% sugar concentrated grapes and Probability of wine from 0.7% acidity
concentrated grapes: 1
Then, Probability of wine from 25% sugar concentrated grapes or probability of wine
from 20% sugar concentrated grapes: 1 – 0.2 = 0.8
Probability of wine from 25% sugar concentrated grapes or probability of wine from
20% sugar concentrated grapes are equally likely,
So, Probability of wine from 25% sugar concentrated grapes: 0.4
Probability of wine from 20% sugar concentrated grapes: 0.4

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 Now, Money made from 0.7% acidity concentrated grapes,
Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Total bottles: 1000 * 12 = 12000
Price obtained for wine from 0.7% acidity concentrated grapes: $2.50 / bottle
Money Mr. Jaeger will make when storm occurs but no botrytis:
12000 * 2.50 = $30000
Money made from 25% sugar concentrated grapes,
Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Total bottles: 1000 * 12 = 12000
Price obtained for wine from 25% sugar concentrated grapes: $3.50 / bottle
Money Mr. Jaeger will make when storm occurs but no botrytis:
12000 * 3.50 = $42000
Money made from 20% sugar concentrated grapes,
Number of cases of Riesling bottled each year: 1000 cases
Case size: 12 bottles
Total bottles: 1000 * 12 = 12000
Price obtained for wine from 20% sugar concentrated grapes: $3.00 / bottle
Money Mr. Jaeger will make when storm occurs but no botrytis:
12000 * 3.00 = $36000
Expected Money when no storm occurs:
(0.4) * (42000) + (0.4) * (36000) + (0.2) * (30000) = $37200
Expected money if we wait for storm:
(0.5) * (41280) + (0.5) * (37200) = $39240
The expected money made if we don’t wait for the storm, $34200, is less
than the expected money made if we wait for the storm, $39240, so
Mr Jaeger should wait for the storm to pass before harvesting.

4. How much should Mr. Jaeger be willing to pay to learn

whether the storm really will hit the Napa Valley?

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 Case 1: We assume that the information is available only about whether the
storm will happen or not.
Expected money to be made when the storm occurs:
0.4 * $67200 + 0.6 * 24000 = 41280
Expected money to be made when no storm: $37200
Money gained by knowing for certain the storm occurs:
= ((0.5) * (41280) + (0.5) * (37200)) - $37200
= 2040
So, maximum money Mr Jaeger will be willing to pay to know for certain
whether the storm will hit Napa $2040.

Case 2: We assume that information is available about the storm and also about
whether this Botrytis occur or not.
Botrytis information:
1. Have information about storm but when storm doesn’t come then
a. harvesting now = 34200
b. harvesting later = 37200
2. Collect information about the storm when storm comes then,
a. Collect information about Botrytis formation = 47400
b. Do not collect information about botrytis formation = 41280
Collect information about storm when storm comes = 47400
Collect information about storm when no storm comes = 37200
Total value of collecting information = 0.5 * 47400 + 0.5 * 37200 = 42300
As derived in question 3, expected money made if we wait for the storm, $39240
So, maximum money Mr Jaeger will be willing to pay to know for
certain whether the storm will hit Napa 42300 – 39240 = $3060

5. How much should Mr. Jaeger be willing to pay to learn

whether botrytis would form if the storm were to hit the
Napa Valley?

Considering that information of the storm exist & he need to collect information about botrytis
formation, then the only two possibilities to be considered are

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 o Botrytis will form (probability = 0.4). So, value of this information = 0.4 * 67200

o Botrytis will not form (probability = 0.6). So, value of this information = 0.6 * 34200

Expected money to be made when the botrytis occurs:

0.4 * 67200 + 0.6 * 34200= 47400
Expected money to be made when no botrytis = 39240
Money gained by knowing for certain the storm occurs:
47400– 39240 = 8160
So, maximum money Mr Jaeger will be willing to pay to know for certain
whether the storm will hit Napa is $8160.

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