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 $12.00 million. This investment will consist of $2.60 million for land and $9.40 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 $5.19 million, $2.48 million above book value. The farm is expected to produce revenue of $2.03 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

NPV       $_______

The project should be accepted or rejected?

Explanation / Answer

Annual Depreciation = (12 - (5.19-2.48))/10 =0.929 million

Annual Tax Expenses = (2.03-0.929)*35% = 0.38535

Annual Post tax cash flow from operation = 1.90-0.38535 = $1.51465 million

Post tAx salvage Value = 5.19-2.48*35% = $4.322

NPV = 1.51465PVIFA(9%,10) +4.322PVIF(9%,10) - 12

= - $453,835.26

Since the npv is negative the project should be rejected

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