Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2724139 • 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 $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.) NPV $ The project should be .
Explanation / Answer
Solution:
Year
Cash flow
PVIF @ 9%
PV
0
(12,100,000)
1.000
(12,100,000)
1
1,920,000
0.917
1,761,468
2
1,920,000
0.842
1,616,026
3
1,920,000
0.772
1,482,592
4
1,920,000
0.708
1,360,176
5
1,920,000
0.650
1,247,868
6
1,920,000
0.596
1,144,833
7
1,920,000
0.547
1,050,306
8
1,920,000
0.502
963,583
9
1,920,000
0.460
884,021
10
6,290,000*
0.422
2,656,964
NPV
2,067,838.01
Year 10 CF = 1,920,000 + 5,210,000 - 2,400,000*0.35 = $6,290,000
Year
Cash flow
PVIF @ 9%
PV
0
(12,100,000)
1.000
(12,100,000)
1
1,920,000
0.917
1,761,468
2
1,920,000
0.842
1,616,026
3
1,920,000
0.772
1,482,592
4
1,920,000
0.708
1,360,176
5
1,920,000
0.650
1,247,868
6
1,920,000
0.596
1,144,833
7
1,920,000
0.547
1,050,306
8
1,920,000
0.502
963,583
9
1,920,000
0.460
884,021
10
6,290,000*
0.422
2,656,964
NPV
2,067,838.01
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