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 $12.10 million. This investment will consist of $2.60 million for land and $9.50 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 $5.06 million, $2.04 million above book value. The farm is expected to produce revenue of $2.03 million each year, and annual cash flow from operations equals $1.83 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 = 1.83*PVIFA(10%,10)+ (5.06 - 2.04*0.35)PVIF(10%,10) -12.10

NPV = 1.83*6.1446 + 4.346* 0.3855 -12.10 = $0.82 Million

NPV = $820,000

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