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 $5.23  million, $2.29  million above book value. The farm is expected to produce revenue of $2.08  million each year, and annual cash flow from operations equals $1.97  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.)

NPV $ 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 $5.23 million, $2.29 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.97 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.

Explanation / Answer

If the annual cash flow from operations includes taxes...
"CF" = cash flow
CF0 = (12.10m)
CFs 1 - 9 = 1.84m
CF10 = 1.84m + sale proceeds 5.23m - tax on gain over book (2.08m * 0.35 = 0.728)
= 6.342

PV of CFs 1 - 9, use Present Value ordinary annuity
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 1.84m[(1 - (1 / 1.09^9)) / 0.09]
= $11.031

PV of CF#10 = 6.342/1.09^10 = $2.678

NPV = (12.10) + 11.031 + 2.678 = $25.809
[or 25.809 depending on how/when you round]

the projector should be acceptable

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