Financial impact of high land prices on the viability of winery startup projects

Abstract

PurposeDoes it make economic sense to invest in winery startups with high land prices? This paper aims to apply a capital budgeting analysis for a startup project to investigate the role of land prices in the decision-making of a wine entrepreneur.Design/methodology/approachThis paper uses a capital budgeting analysis to evaluate the value of a winery project using the six investment criteria: net present value (NPV), internal rate of return (IRR), modified IRR, profitability index, payback period (PB) and discounted PB.FindingsThis study finds that high land prices are economically justifiable (NPV is greater or equal to zero) when the weighted average capital cost is sufficiently low for investors who are able to diversify risks and with access to a cheap source of funds. Additionally, this study demonstrates that wine entrepreneurs need a long-term investment horizon because the recovery of the initial investment in winery startup projects takes many years.Research limitations/implicationsThe startup winery projects are heavily influenced by wine pricing, production and cost assumptions. As a result, different assumptions made at other wine regions may result in slightly different outcomes for the acceptability of the wine startup projects.Practical implicationsHigh land prices are economically justified for investors and entrepreneurs with the ability to diversify risk and access to cheap financial resources. As such, land prices can be a critical obstacle for individual entrepreneurs who experience a lack of capital.Social implicationsIn the famous wine regions of the world, high land prices may result in more wineries being owned by the capital rich wine conglomerates.Originality/valueThis paper provides estimations of land prices based on financial methods to discuss the justification of observed prices and the implications regarding the ability of investors and entrepreneurs to access capital.