Stillwater Drinks is trying to determine when to harvest the water from the foun

Question

Stillwater Drinks is trying to determine when to harvest the water from the fountain of youth that it currently owns. If it harvests the water in year 1, the NPV of the project would increase over an immediate harvest by 18 percent. A year 2 harvest would create an NPV increase of 12 percent over that of year 1 and year 3 would create an NPV increase of 8 percent over that of year 2. If the cost of capital is 17 percent for Stillwater, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today. A.) Harvest immediately. B.) Harvest in year 1. C.) Harvest in year 2. D.) Harvest in year 3.

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks Let the NPV of immediate harvest be 100. With respect to present day, year 1 NPV = 1.18 *100 year 2 NPV = 1.18 * 1.12 * 100 year 3 NPV = 1.18 *1.12*1.08 * 100 With respect to respect years year 1 NPV = 1.18 *100 / 1.17 year 2 NPV = 1.18 * 1.12 * 100 /1.17^2 year 3 NPV = 1.18 *1.12*1.08 * 100/1.17^3 So the maximum NPV is the one at the end of year 1

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.