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 $12.10 million. This investment will consist of $2.30 million for land and $9.80 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 $5.11 million, $2.04 million above book value. The farm is expected to produce revenue of $2.10 million each year, and annual cash flow from operations equals $1.95 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

Explanation / Answer

depreciation each year = ( 12.1 - 5.11)/10 = 0.699

cash flow each year = 1.95 * ( 1 - tax) + depreciation

= 1.95 * 0.65 + 0.699 = 1.9665

NPV = 1.9665 / ( 1+ 0.09)^1 + 1.9665 / ( 1+ 0.09)^2 + 1.9665 / ( 1+ 0.09)^3 +.........1.9665 / ( 1+ 0.09)^10

= 12.62 million

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