All questions tagged Oliver Wyman case: Setting up a Wine Cellar - Consulting Q&A - PrepLounge.com

I agree with Denis.

Importantly, for every case we have to be clear about the objective, the maximization criteria (client goals or 2nd objective in a sense), and the constraints.

Here, we have:

Objective/Maximization Criteria: "To earn enough money with the “investment” section of the cellar in order to subsidize whatever I consume in the “drinking” section over time"

Constraint: "I'm obviously constrained by several things: the amount of money I am able to spend, the amount of wine I can (or want to) drink, the space available for the cellar"

Hi,

I'm sorry but your question is very confusing. The case specifically states:

"You have the kick-start of $13,500 and then only costs for the first 5 years. After 5 years, you sell the kick-start of 120 investment bottles and get a big push in revenue of 120*$250=$30,000."

Which means he does not sell the kickstart bottles at the end of the 1st year.

Turns out wine has actually not been a bad investment in recent years (in absolute terms...relative to stock market it has seriously underperformed).

However, 20% is crazy.

https://www.wineinvestment.com/wine-investment/market-performance/

The two main reasons 20% is a crazy return? 1) The asset does not generate recurring revenue (and has no potential to, unlike land or a company) 2) Scarcity only increases slowly over time

Hi,

Agree the case is not fully clear on that,

The correct way to look at it is the following:

- Consider that exactly after 5 years you can only sell the kick-start.

- You will then sell six bottles every month for the following 12 months up to the first day of year 6.

If you look at the plot, the increase from year 5 to year 6 is almost 15 k which is consistent with:

Kick-off ($30.000) + 72 bottles (18.000) - costs (13.200) =14.800

Hope you find this helpful,

please don't hesitate to contact me in case you have any doubt,

Thanks,

Ale

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

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

Hello Akane,

Maybe I didn't get the meaning of your question but those information are given by the interviewer. At that point you should just worry to ask the right question in order to get the data needed to solve the case. You don't have to do any assumption on them.

Does it make sense?

This doesn't matter! This isn't in the prompt/question.

The interviewer, clearly a Partner (joke), has the $ to build the cellar.

Regardless, the rate at which he/she could obtain the loan is technically the same rate at which he/she could loan out their money.

Therefore, in both situations, your hurdle rate is the opportunity cost (if asked, which it wasn't). Of course, you could probably recommend "Yes, you can do this, but it'd be better to invest it and use THOSE returns to fund your wine"

Hi Sujay,
do you mean the space available for the cellar? The point appeared to be relevant at the beginning of the case, but later it has not been processed. It often happens that important aspects of the case are not crucial for the particular solution that the interviewer has in mind and, since the case can last 20-30 minutes max, it will be neglected.

Hope it helps,
Antonello

Hello Ameja,

Can you specify what are your doubts?
I will try to clarify the solution dividing the calculation in 4 steps, (you can have a look at the graph in the bottom):

1. Initial investment: 12k$ for investment bottles and 1500$ for drinking bottles, 13500$ totally Cumulative return: -13500$
2. First 5 years: no revenues from selling bottles. As costs we have monthly $300 for purchase of drinking wine, $600 for investment wine, and $200 for maintenance of the cellar. In total 12*1100$=13200$ per year Cumulative return: -13500$ - 5* 13200$= -79500$
3. End of 5th year: selling of the initial stock. Per each bottle we receive $100*(1 + 20%)^5=250$ (approximately). We have an inital stock of 120 investment bottles, so 120*250$=30k$ Cumulative return: -79500$ +30000 $ =-49500$
4. Starting from 6th year: Costs stable at 13200$ per year, revenues of 72*$250=$18,000. We have a net return of 4800$ per year. Years needed to break even: - 49500$ / 4800$ = 10.3 years. So we have that we will have a positive cumulative return starting from year 16 (15 years after).

Feel free to contact me for further discussion.
Hope it helps,
Luca

You are right, don't be ever afraid of asking the data that you need.
I suggest to deline your strategy at the beginning of the case stating the data that you need: the interviewer will give you the numbers or will ask you to do an educated guess.

Best,
Luca

Hi Sujay,
the numbers interviewer is providing are different depending on personal bottles (avg 30$) and investment bottles (100$)

Best,
Antonello

Hi Sujay,
it is the yearly percentage of value growth of the investment bottles.

Best,
Antonello

Hello Sujay,

It's not an hypotesis that you are asked to make, it's clearly stated in the point 5:

Always after exactly 5 years, no cost of sale, always a buyer, no discounting

Hope it helps,

Luca

Hello Sujay,

• Average consumption is indicated at point 3

2 bottles per week to drink, plus 2 per month to give away as gifts

• Amount available to spend is indicated at point 2:

Initial kick-start $1,500/$12,000, $300/$600 per month thereafter

Hope it helps,

Luca

As quick answer, of course, is great "something a bit more than $200, we can assume $250" (you can say here $240, $230 or anything higher than 200 but lower than 300, use common sense).

No interviewer will ever ask you the exact number, but with a few seconds more you can really crack it. The most relevant addends in the whole compound interest formula (1+p)^n are the first three:

• 1
• n*p
• n*(n-1)/2 * p^2

Therefore in our problem we have: 1 + 5*0.2 + 5*4/2 * 0.2^2 = 1 + 1 + 0.4 = 2.4 -> $240

After a little practice, you will find this formula very easy and immediate, but you will impress every interviewer you are going to face with.

Try it in similar problems and let me know :)

Best,

Antonello