Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2708822 • 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 $2.20 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 $5.13 million, $2.35 million above book value. The farm is expected to produce revenue of $2.09 million each year, and annual cash flow from operations equals $1.99 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.)
Explanation / Answer
2)
$2,300,000.00
$9,600,000.00
$11,900,000.00
Year
0
1
2
3
4
5
6
7
8
9
10
Investment
Cash flow from operation Tax
Cash flow after tax
Sale
Total Cash flow
$-11,900,000.00 $-11,900,000.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$1,202,500.00
$1,850,000.00
$647,500.00
$1,202,500.00
$5,000,000.00
$6,202,500.00
Initial Investment
Land
Trucks and others
Total
Year
D iscount rate 9%
NPV $-2,070,712.58
N PV is negative, hence reject the project
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.