Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2707217 • Letter: A
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 $11.90 million. This investment will consist of $2.30 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 $5.28 million, $2.35 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 10 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)
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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 $11.90 million. This investment will consist of $2.30 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 $5.28 million, $2.35 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 10 percent. Calculate the NPV of this investment.
Explanation / Answer
Cash flow of investment in year 0 is: $(11,900,000)
Annual cash flows from operations= $1,900,000
Present value of free cash flows:
PV(FCF) = Annual CF *PV Annuity factor
=$1,900,000 *PVA(10%,10)
= 1900,000*(1- (1+i)^(-n))/i
= 1900,000*(1-(1+10%)^(-10))/10%
= 1900000*6.1446
= $11,674,740.00
Book value of asset = (5.28M-2.35M) = $2,930,000
Sale price of asset = $5,280,000
Tax on sale of an asset =(Selling price of asset - Book value of asset)
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