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 $12.20 million. This investment will consist of $2.10 million for land and $10.10 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 $5.07 million, $2.07 million above book value. The farm is expected to produce revenue of $2.06 million each year, and annual cash flow from operations equals $1.87 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Explanation / Answer

NPV= -12.20million+[1.87PVIFA(10%,10)]+[5.07-(2.07*.35)]/1.1^10

NPV= -12200000+(1870000x6.1446)+(4345500x.38554)

NPV= -12200000+11490340.49+1675378.364

NPV= $965,718.86

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