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 $2.40 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.)

Explanation / 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

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.