Essay on Calaveras Vineyards

1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:

In order to assess Calaveras’ value, I calculated the free cash flow from 1994 to 1998. The free cash flow from each year derived from adding Earnings before Interest and Taxes,

The winery industry can be categorized into red and white wine segments. The red wine segment, measured by tonnage of varietals crushed, has grown at a compounded annual rate of 4.7% for 10 years from 1989 to 1998, and a year over year growth rate of 8.2% from 1998 to 1999. Judging by the strong growth rate experienced in the red wine segment, it is reasonable to conclude that the red wine segment is in the growth phase of the life cycle model. In addition, production of red wine varietals which are relatively unknown such as syrah and sangiovese nearly doubled in a year from 1998 to 1999. The white wine segment, however, is at the mature phase of its life cycle as the segment shrunk slightly by 0.42% from 1998 to 1999. Overall, the industry is still at the growth stage lead by growth in the red wine segment.

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

It should be noted that an income approach could have also been used. Using a determined market discount rate of 6% and current year revenue of $3,028,000 at a four year discounted rate, the value would have been $12,040,548. Because adequate market information was available to make a more accurate estimate of the fair value, this is the estimate that was chosen.

The appropriate discount rate was calculated using WACC formula as shown in the ‘WACC’ exhibit using the following assumptions:

Before moving forward to compute the present value of these cash flows, a terminal value is required to forecast the long term value of the company after 5 years. . Following formula is used to calculate the terminal value.

The free cash flow method is used to gauge “a company’s cash flow beyond that necessary to grow at the current rate… [to ensure companies] make capital expenditures to continue to exist and to grow” (Drake, n.d.). Calculation of free cash flows utilizes various components, including a firm’s value, cash flow forecasts, a firm’s capital structure, the cost of capital, and/or discounted cash flows.

These amounts of tax savings should be added to the incremental cost savings for each year to come up with the total cash inflows. The present value of all these cash inflows and outflows can be calculated by discounting them at 12.19%. This rate is calculated by assuming that the purchasing power parity holds in this scenario. The company can do the feasibility analysis by looking at both from the subsidiary’s and parent’s perspective by assuming that the purchasing power parity holds. Hence, this rate can be regarded as opportunity cost of investment because it is the second best alternative for the company for investment purposes.

NORTHERN NAPA VALLEY WINERY Period Month-Year Sales MA CMA Snl Factor Ad trend est Snl Inx Forecast 1 Jan-88 6,632 7414.480161 0.895433355 6639.172848 2 Feb-88 6,534 7495.930161 0.855674227 6414.07425 3 Mar-88 6,675 7577.380161 0.915057445 6933.738129 4 Apr-88 6,692 7658.830161 0.924270145 7078.828067 5 May-88 6,984 7740.280161 0.942241926 7293.21649 6 Jun-88 7,133 7821.730161 0.938433481 7340.173459 7 Jul-88 6,385 7,727 0.826274271 7903.180161 0.887321174 7012.659097 8 Aug-88 7,364 7,760 0.948999646 7984.630161 0.732715692 5850.463814 9 Sep-88 7,171 7,816 0.917432953 8066.080161 0.960270745 7745.620807 10 Oct-88 8,690 7,906 1.09918257 8147.530161 1.09169761 8894.639202 11 Nov-88 10,299

In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There

Free cash flows should be discounted at the firm 's weighted average cost of capital to find the value of its operations.

Because, human(s) being(s), health, may depend upon crop growing, living organism multiplicity. Should, savor gardening, from old massive habits. Allowing, opportunities, of vast-full new efforts to grow a garden, continue being a gardener.

Free cash flow is then estimated from the net income by subtracting capital expenditures, which are estimated to be less than $1 million for 1992. Additionally, there are several additional expenses for 1991 that I believe are ignored by Goldman Sach’s estimate. The first is the potential clean-up costs from the spill in the New Jersey plant, estimated at $300,000. However, weighing other possible outcomes, I estimate the cost to be $374,000, occurring by the end of 1991.

From 2012 to 2017, the state of California had to be deal with the worst drought in the last 1000 years. This drought was one of the longest drought in California’s history. The precipitation over the course of the five years was a record low and the decrease in the snowpack lead to the surface water reservoirs to start declining at a higher pace. This change in reservoirs caused the state governor to call for an executive action to call for a cutback in the towns’ and cities’ water usage by 20% (Sheikh, Cody, & Stern, 2014). These policies and actions have tried to stabilize the water reservoirs and allow for society to continue to work efficiently, but the drought lead to huge economic losses in multiple industries across the state. One