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 $2.20 million for land and $9.90 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 $5.25 million, $2.11 million above book value. The farm is expected to produce revenue of $2.04 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 10 percent.

Calculate the NPV of this investment.

Explanation / Answer

PV of inflow= (2.04+1.90)*(1-.35)=2.567

Pv=2.567*6.144=15.734

Pv of sale value=5.25*(1-.35)*0.385=1.318125

total inflow=15.734+1.318125=17.0478

NPV=-12.10+17.0478=4.9478

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