Windy Burgers is trying to determine when to harvest a herd of cows that it curr

Question

Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1, and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

Explanation / Answer

Since cost of capital is 12%. So Windy Burgers should wait until NPV of the project would increase over last year is more than 12%. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1. So Windy Burgers should definitely harvest after year 2. Since NPV in third year is 7%, less than 12%.

Hence, Windy Burgers should harvest in year 2.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

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