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 $11.80 million. This investment will consist of $2.00 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 $5.18 million, $2.03 million above book value. The farm is expected to produce revenue of $2.01 million each year, and annual cash flow from operations equals $1.87 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Explanation / Answer

NPV $ 1,413,526 . Year Cashflow PV factor @ 10% PV 0 -11,800,000 1.00 (11,800,000) 1 1,870,000 0.91 1,700,000 2 1,870,000 0.83 1,545,455 3 1,870,000 0.75 1,404,959 4 1,870,000 0.68 1,277,235 5 1,870,000 0.62 1,161,123 6 1,870,000 0.56 1,055,566 7 1,870,000 0.51 959,606 8 1,870,000 0.47 872,369 9 1,870,000 0.42 793,063 10 6,339,500 0.39 2,444,152 NPV 1,413,526.22 project should be accepted as NPV is +ve. After-tax Salvage value of the assets = '5180000-(2030000*0.35) 4,469,500

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