Archer Daniels Midland Company is considering buying a new farm that it plans to

Question

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.90 million. This investment will consist of $2.30 million for land and $9.60 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.12 million, $2.47 million above book value. The farm is expected to produce revenue of $2.03 million each year, and annual cash flow from operations equals $1.87 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

Explanation / Answer

Initial Investments = $11,900,000
Annual cash flow net of taxes = (1-35%)*1,870,000
= $1,215,500
Tax on selling of land and equipment = Tax Rate*Capital Gain
= 35%*2,470,000
= $865,500
Net Cash Received on Sale = Sale Price

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