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 maximise the NPV for the company? Assume that all NPVs are calculated from the perspective of today.

Question

Quizplus · Accepted Answer

Harvesting in year 1 maximizes the NPV because the increase in NPV (18%) is greater than the cost of capital (17%), while subsequent increases (12% in year 2 and 8% in year 3) are less than the cost of capital.

Stillwater Drinks Is Trying to Determine When to Harvest the Water