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 $12.00 million. This investment will consist of $2.00 million for land and $10.00 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 $5.00 million, $2.00 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.80 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.)

Explanation / Answer

Assuming Annual Cash Flow from operation is after tax.

Initial Investment = 12,000,000

Annual Depreciation = (10000000-2000000)/10

Annual Depreciation =800,000

Annual Cash Flow from operation = $ 1,800,000

Terminal Value = Post tax sale value of land + Post tax sale value of Truck & Equipment

Terminal Value = (5000000 – 35%*(50000000-2000000) ) + 2000000

Terminal Value = 5,950,000

NPV of this investment = - Initial Investment + PV of Annual Cash Flow from operation + PV of Terminal Value

NPV of this investment = -12000000 + 1800000 *(1-(1+10%)^-10)/10% + 5950000*(1+10%)^-10

NPV of this investment = $ 1,354,203.36

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