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 $12.00 million. This investment will consist of $2.40 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 $5.09 million, $2.40 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.

Explanation / Answer

Hi,

Please find the answer as follows:

Salvage Value = 5090000

Less Tax on Gain Realized from Sale (2400000*.35) = 840000

After Tax Cash Inflow at the End of Useful Life = 4250000

NPV = -12000000 + 1900000/(1+.09)^1 + 1900000/(1+.09)^2 + 1900000/(1+.09)^3 + 1900000/(1+.09)^4 + 1900000/(1+.09)^5 + 1900000/(1+.09)^6 + 1900000/(1+.09)^7 + 1900000/(1+.09)^8 + 1900000/(1+.09)^9 + 1900000/(1+.09)^10 + 4250000/(1+.09)^10 = 1988795.56 o 1988796

Answer is 1988795.56 o 1988796.

Thanks.

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