Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2628193 • 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 $2.30 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 $5.09 million, $2.33 million above book value. The farm is expected to produce revenue of $2.05 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
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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 $2.40 million for land and $9.60 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 $5.01 million, $2.11 million above book value. The farm is expected to produce revenue of $2.06 million each year, and annual cash flow from operations equals $1.96 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.)
answer
Annual depreciation = (12-(5.01-2.11))/10 = 0.91
Annual Tax Expenses = (2.06-0.91)*35% = 0.4025
Annual Post tax cash flow from operation = 1.96-0.4025 = $1.5575 million
Post tAx salvage Value = 5.01-2.11*35% = $4.2715
NPV = 1.5575PVIFA(10%,10) +4.2715PVIF(10%,10) - 12
= - $782,988.57
Since the npv is negative the project is not viable
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