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 $2.70 million for land and $9.40 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 $5.21 million, $2.40 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.92 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

nper 10 rate 9% PMT ((2.08+1.92)*(1-0.35)) 2.6 Fv (5.21- (5.21-2.4)*0.35) 4.2265 pv $18.47 initial cost -12.1 NPV $6.37

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