How do we know that the revenue generated is not reinvested?

Question

With this type of case, how can one know (or at least justify the assumption) that reinvestment of the proceeds should not be considered? It seems like it would be a good opportunity to grow the cellar and increase long-term revenue.

It also looks like the proposed solution reduces the number of investment-grade bottles by 192 at the end of year 5 when evaluating the cellar size, but when looking at revenue generated, only 120 bottles are sold at the end of year 5.

Answer 1

Hello,

Your point could be reasonable but the text states clearly the amount of the yearly investment that our client is willing to do.

Regarding the second point, the solution is not really clear but the crucial part is to clearly define the timeline. I will try to explain it a bit better:

Assume that you buy the kick-start at time 0
Assume that you buy and sell the investments bottles during the whole year. It means that, on average, you can consider the bottles acquired at June of the first year (0.5), June of the second year (1.5) ecc.
At the end of the 5 years you have: kick-start bottles + 5 * yearly bottles + drinking bottles =120 + 5 * 72 + 50 = 530
At the end of year 6 you have: bottles year 5 + new bottles - sold bottles = 530 + 72 - 192 = bottles at year 5 - 120
Analyzing the cashflow, at the end of year 5, you have: 120 bottles ready to be sold and 72 bottles of 4.5 years that you can not sell and that will be sell at 5.5 years

Does it make sense?

Best,
Luca