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 $5.04  million, $2.37  million above book value. The farm is expected to produce revenue of $2.04  million each year, and annual cash flow from operations equals $1.88  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 cash flow from operation = 1.88 million

Post tAx salvage Value = 5.04-2.37*35% = $4.2105

NPV = 1.88PVIFA(10%,10) +4.2105PVIF(10%,10) - 12.20

= 0.97511618 Million or $975,116.18

Since the npv is positive the project should be accepted

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