Mackmyra Whisky AB needs additional funds for further expansion. The problem with their business of producing...

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Mackmyra Whisky AB needs additional funds for further expansion.The problem with their business of producing and selling whisky isa long cash conversion cycle, which means that cash comes in only9, 12 or 15 years after production due to the long storage time ofthe whisky in oak barrels.

Mackmyra AB considers to take a loan of 30 million SEK for theexpansion at a borrowing rate of 3%. However, Mackmyra's new CFO, aformer JIBS student, proposes to sell 30-liter whisky barrels inadvance to customers right after production. (Customers would takecare themselves regarding the storage of their whisky barrels forsome years until the whisky is bottlened and ready forconsumption.) However, the price of a freshly distilled whiskybarrel (called a zero-year barrel) is lower than those of 9, 12 or15 years old barrels. The CFO estimates that Mackmyra could sellthe zero-year barrel at a price of 17750 kr. Currently, 9-yearbarrels are sold at a price of 25000 kr, 12-year barrels are soldat a price of 28500 kr and 15-year barrels are sold at a price of31000 kr. (For the sake of simplicity, we assume that there won'tbe price changes for the barrels in the coming years.)

a.) Calculate the NPV of this proposal.Assumption: From three produced whisky barrels, one is sold as9-year, one is sold as 12-year, and the third one is sold as a15-year barrel.

(Hint: assume that selling three zero-year barrels implies to loosethe income from selling them as 9-, 12-, and 15-year barrel lateron.)

b.) At which price of the zero-year barrel is Mackmyraindifferent between taking a loan or selling the zero-yearbarrels? (or to put it differently, at which price of thezero-year barrel do we have a break-even?)

c.) Consider now the perspective of an investor who isinterested to buy zero-year barrels at a price of 17750kr. What is the IRR of buying threezero-year barrels and keeping them until 9, 12 and 15 yearsrespectively, and to sell them in those years at the prices statedabove? (We assume again that prices do not change and thatthe investor has no storage costs.)

d) If the investor has an opportunity cost of capital of3%, should she buy the zero-year barrel at a price of17750 kr?

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4.1 Ratings (488 Votes)

Part aLets assume Mackmyra sells 3 barrels of the zeroyear barrel ata price of 17750 kr He she therefore loses the opportunity tosell at a future date1 barrel each of 9year barrels at a price of25000 kr 12year barrels at a price of 28500 kr and 15yearbarrels at a price of 31000 krSo the cash flows will look See Answer

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Mackmyra Whisky AB needs additional funds for further expansion.The problem with their business of producing and selling whisky isa long cash conversion cycle, which means that cash comes in only9, 12 or 15 years after production due to the long storage time ofthe whisky in oak barrels.Mackmyra AB considers to take a loan of 30 million SEK for theexpansion at a borrowing rate of 3%. However, Mackmyra's new CFO, aformer JIBS student, proposes to sell 30-liter whisky barrels inadvance to customers right after production. (Customers would takecare themselves regarding the storage of their whisky barrels forsome years until the whisky is bottlened and ready forconsumption.) However, the price of a freshly distilled whiskybarrel (called a zero-year barrel) is lower than those of 9, 12 or15 years old barrels. The CFO estimates that Mackmyra could sellthe zero-year barrel at a price of 17750 kr. Currently, 9-yearbarrels are sold at a price of 25000 kr, 12-year barrels are soldat a price of 28500 kr and 15-year barrels are sold at a price of31000 kr. (For the sake of simplicity, we assume that there won'tbe price changes for the barrels in the coming years.)a.) Calculate the NPV of this proposal.Assumption: From three produced whisky barrels, one is sold as9-year, one is sold as 12-year, and the third one is sold as a15-year barrel.(Hint: assume that selling three zero-year barrels implies to loosethe income from selling them as 9-, 12-, and 15-year barrel lateron.)b.) At which price of the zero-year barrel is Mackmyraindifferent between taking a loan or selling the zero-yearbarrels? (or to put it differently, at which price of thezero-year barrel do we have a break-even?)c.) Consider now the perspective of an investor who isinterested to buy zero-year barrels at a price of 17750kr. What is the IRR of buying threezero-year barrels and keeping them until 9, 12 and 15 yearsrespectively, and to sell them in those years at the prices statedabove? (We assume again that prices do not change and thatthe investor has no storage costs.)d) If the investor has an opportunity cost of capital of3%, should she buy the zero-year barrel at a price of17750 kr?