1. Archer Daniels Midland Company is considering buying a new farm that it plans
ID: 2703092 • Letter: 1
Question
1.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 $11.80 million. This investment will consist of $2.10 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 $5.20 million, $2.23 million above book value. The farm is expected to produce revenue of $2.09 million each year, and annual cash flow from operations equals $1.98 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.
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 $11.80 million. This investment will consist of $2.10 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 $5.20 million, $2.23 million above book value. The farm is expected to produce revenue of $2.09 million each year, and annual cash flow from operations equals $1.98 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.Explanation / Answer
Dep on Truck & Other eqpt using SLN = 9.70/10 = 0.97
Land is Not depreciable
Book Value = Sale - Salvage = 5.20-2.23 = 2.97
Profit on Sale = 2.23
AT Salvage value : Salvage value = Sales value - Taxrate*(Sale Value - Book Value)
= 5.20 - 35%*(5.20-2.97)
= 4.42
Annual CF = 1.98M
Add back Dep = 0.97M
So OCF = 2.95M
This is CF from Y1 to Y9.
In Y10, we have CF = OCF+After Tax Salvage = 2.95+4.42 =7.37
So We have NPV = CF0 + CF1...Cf10
= -11.80 + 2.95*PVA(9%,9) + 7.37*PV(9%,10)
= -11.80 + 2.95*5.9952 + 7.37*0.4604
=$9.28M
So NPV is 9.28M
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.