Stillwater Drinks Is Trying to Determine When to Harvest the Water

question 1

Multiple Choice

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.

• A) Harvest immediately.
• B) Harvest in year 1.
• C) Harvest in year 2.
• D) Harvest in year 3.

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Definitions:

Capital Balances

The amounts in a business's equity accounts that represent the owners' stakes in the company.

Noncash Assets

Assets owned by a business that cannot be easily converted to cash, such as property, plant, and equipment.

Loss on Realization

A financial loss recognized when liquidating assets yields less value than initially recorded on the books.

Income Ratio

A financial metric comparing some form of an entity's income to another, providing insights into financial stability, profitability, or performance.