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.

Explanation / Answer

When taking decisions under NPV, decision with highest NPV should be selected among others. If NPV is highest, firm value will be at its highest level. Here, NPV is highest when harvesting in year 1. So this should be selected.

Harvest in year 1.

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