Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2643257 • 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 $12.00 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.)
What is the NPV and should the project be accepted or not?
Explanation / Answer
Particulars Time PVF Amount PV Cash Outlows - 1.0000 (12,000,000.00) (12,000,000.00) PV of Cash Outflows (12,000,000.00) Cash Inflows 1.00 0.91 1,800,000.00 1,636,363.64 Cash Inflows 2.00 0.83 1,800,000.00 1,487,603.31 Cash Inflows 3.00 0.75 1,800,000.00 1,352,366.64 Cash Inflows 4.00 0.68 1,800,000.00 1,229,424.22 Cash Inflows 5.00 0.62 1,800,000.00 1,117,658.38 Cash Inflows 6.00 0.56 1,800,000.00 1,016,053.07 Cash Inflows 7.00 0.51 1,800,000.00 923,684.61 Cash Inflows 8.00 0.47 1,800,000.00 839,713.28 Cash Inflows 9.00 0.4241 1,800,000.00 763,375.71 Cash Inflows 10.00 0.3855 1,800,000.00 693,977.92 Cash Inflows(Sale of land and truck) 10.00 0.3855 4,300,000.00 1,657,836.14 PV of Cash Inflows 12,718,056.93 NPV 718,056.93 Sale Value 5,000,000.00 Gain on Sale 2,000,000.00 Tax Rate @ 35% 700,000.00 Sale Value (net of tax) 4,300,000.00
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