Steady State after 5 years

Oliver Wyman case: Setting up a Wine Cellar
New answer on Feb 29, 2020
2 Answers
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Richard
Premium
asked on Feb 11, 2020

Shouldn't the steady state after 5 years regarding the investment wine be at 432 bottles?

In Year 5 I will have 552 bottles. Going to year 6 i will sell the initial 192 bottles and buy another 72 bottles. So the difference would be 432. From year 6 on I will always sell and buy 72 bottles a year so the investment wine reaches a steady state.
It seems like the solution has forgotten to account for the wine bought in year 6? Or am I mistaken?

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Luca
Expert
Content Creator
replied on Feb 29, 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello Richard,

THe text can be a bit confusing but I will try to explain it 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 =410

Does it make sense?
Best,
Luca

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Jessica
Expert
replied on Feb 12, 2020
Oliver Wyman | University of Oxford | MBA | Experienced Career Coach

Hi there,

Funnily enough, I solved this case in one of my interviews at OW a few years ago - I remember it well!

Looking at your question, I think you may have a math error somewhere in your calculations. At the end of year 5, there should be 50 + 480 = 530 bottles, as opposed to 552. From there, the original 192 are sold and another 72 are purchased, bringing us to 50 + 360 = 410 bottles.

Feel free to send me a message if you want to chat further about this case, or interviewing at OW/elsewhere in general.

Best,

Jessica

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Richard on Feb 19, 2020

Hey Jessica, thank You for the reply and sorry for my late answer! Yes I messed up some numbers ending up in year 6 and the mentioned 552. What I still do not get is the logic of selling the 'intial 192 bottles'. The only initial bottles are 120. Meaning after 5 years I can only sell these. The other 72 bottles have been bought in the time between year 0 and year 1. Meaning that after year 5 these 72 bottles are not 5 years old already and should be sold until the end of year 5/beginning of year 6. That is why my steady state is 432 bottles as opposed to the 360 in the solution.

Jessica on Feb 19, 2020

Hi Richard, no worries. The solution assumes the following: "The following diagrams are based on the assumption that the bottles initially purchased are as old as the bottles being bought in the first year". Therefore 192 bottles are sold together. Your solution would also be perfectly acceptable "How the interviewee does the annual accounting (does the up-front kick-start count as year “0” or year 1, etc.) should not matter". The solution provided just uses the simplifying assumption. Hope that makes sense!

Luca gave the best answer

Luca

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BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached
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