When to harvest an asset: Farmer Ag owns a special species of cotton-producing plant that, if left unharvested, grows a bigger bowl of cotton through time. The NPV, at the beginning of the year that harvesting takes place, is as follows. When should Farmer Ag harvest its cotton? Assume a discount rate of 14 percent. NPV₁= $50,000
NPV₂= $60,000
NPV₃= $69,000
NPV₄= $77,280
NPV₅= $85,008

Question

Quizplus · Accepted Answer

To determine the best time to harvest the cotton, we need to calculate the present value of each cash flow using the NPV formula. We'll assume that the initial cost of producing the cotton is zero, which means that we can just compare the NPVs directly. Using a discount rate of 14%, we get the following: NPV( to _{4) = $50,000 + $60,000 + $69,000 + $77,280 = $256,280
NPV(} to _{5) = $50,000 + $60,000 + $69,000 + $77,280 + $85,008 = $341,568

Therefore, the best choice is to harvest in year 3 (choice D), when the NPV is highest. By waiting until year 3 to harvest, Farmer Ag will receive a higher net present value of future cash receipts.}

When to Harvest an Asset: Farmer Ag Owns a Special