When to harvest an asset: Cleveland Millicrum is considering when to harvest its moldy bread supply for antibiotics. It has calculated that the current NPV dollars for harvesting the bread are increasing according to the following schedule. When should the firm harvest the bread? The cost of capital for the firm is 14 percent.
NPV increase if harvested next year over that of harvesting now 25%
NPV increase if harvested year 2 over that of harvesting year 1 20%
NPV increase if harvested year 3 over that of harvesting year 2 17%
NPV increase if harvested year 4 over that of harvesting year 3 13%
NPV increase if harvested year 5 over that of harvesting year 4 10%

Question

Quizplus · Accepted Answer

The firm should harvest the bread in year 3 because the NPV increase from year 2 to year 3 (17%) is greater than the cost of capital (14%), but the increase from year 3 to year 4 (13%) is less than the cost of capital.

When to Harvest an Asset: Cleveland Millicrum Is Considering When