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 $11.90 million. This investment will consist of $2.50 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 $5.03 million, $2.43 million above book value. The farm is expected to produce revenue of $2.09 million each year, and annual cash flow from operations equals $1.92 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.)

Accepted or Rejected

Explanation / Answer

If the annual cash flow from operations includes taxes...
"CF" = cash flow
CF0 = (11.90m)
CFs 1 - 9 = 1.92m
CF10 = 1.92m + sale proceeds 5.03m - tax on gain over book (2.09m * 0.35 = 731,500)
= 6,218,500

PV of CFs 1 - 9, use Present Value ordinary annuity
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 1.92m[(1 - (1 / 1.10^9)) / 0.10]
= $11,057,325.73

PV of CF#10 = 6,218,500/1.10^10 = $2,395,958.77

NPV =- (11,900,000) + 11,057,325.73 +2,395,958.77 = $1,553,284.5
[or$1,553,284.5 depending on how/when you round]

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