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 $2.40 million for land and $9.70 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 $5.06 million, $2.03 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.89 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.

NPV $

Explanation / Answer

CF0 = (12,100,000)
CFs 1 - 9 = 1,840,000
CF10 = 1.84m + ((sale proceeds 5.06m - tax on gain over book (2.03m * 0.35 = 710,500)))
= 1840000+((5060000-(2030000*0.35)))

PV of CFs 1 - 9, use Present Value ordinary annuity
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
=1840000*((1-(1/1.09^9))/0.09)
= $11,031,254.29

PV of CF#10 = 6,189,500/1.09^10 = $2,614,511.69

NPV = (12,100,000) + 11,031,254.29 + 2,614,511.69 = $1,545,766 (Rounded)

Archer Daniels Midland Company NPV & IRR Calculations WACC 0.09 Yr 0 Initial Investment -12,100,000.00 Year Cash Flow NPV Factor PV Cash Flow 0      (12,100,000)                     1     (12,100,000) 1           1,840,000        0.91743          1,688,073 2           1,840,000        0.84168          1,548,691 3           1,840,000        0.77218          1,420,818 4           1,840,000        0.70843          1,303,502 5           1,840,000        0.64993          1,195,874 6           1,840,000        0.59627          1,097,132 7           1,840,000        0.54703          1,006,543 8           1,840,000        0.50187              923,434 9           1,840,000        0.46043              847,187 10           6,189,500        0.42241          2,614,512 NPV          1,545,766 IRR (Cash Flow) 11.46%

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