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 $2.60 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 $5.02 million, $2.35 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.90 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.)

NPV $ 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 $2.60 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 $5.02 million, $2.35 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Explanation / Answer

Annual depreciation = (12.20-(5.02-2.35))/10 = 0.953

Annual Tax Expenses = (2.08-0.953)*35% = 0.39445

Annual Post tax cash flow from operation = 1.90-0.39445 = $1.50555 million

Post tAx salvage Value = 5.02-2.35*35% = $4.1975

NPV = 1.50555PVIFA(10%,10) +4.1975PVIF(10%,10) - 12.20

= - $1,330,729.04

Since the npv is negative the project is not viable

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