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 $11.80  million. This investment will consist of $2.90  million for land and $8.90  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 $5.02  million, $2.35  million above book value. The farm is expected to produce revenue of $2.02  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.)

Explanation / Answer

NPV= -11.8million+[1.92PVIFA(10%,10)]+[5.02-(2.35*.35)]/1.1^10

NPV= -11800000+(1920000x6.1446)+(4197500x.38554)

NPV= -11800000+11797568.84+1618317.957

NPV= $ 1,615,886.797 or 1,615,886.80

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