Archer Daniels Midland Company is considering buying a new farm that it plans to
ID: 2703598 • Letter: A
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 $5.27 million, $2.43 million above book value. The farm is expected to produce revenue of $2.01 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 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)
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 $5.27 million, $2.43 million above book value. The farm is expected to produce revenue of $2.01 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 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)Explanation / Answer
Dep on Truck & Other eqpt using SLN = 9.40/10 = 0.94
Land is Not depreciable
Book Value = Sale - Salvage = 5.27-2.43 = 2.84
Profit on Sale = 2.43
AT Salvage value : Salvage value = Sales value - Taxrate*(Sale Value - Book Value)
= 5.27 - 35%*(5.27-2.43)
= 4.28
Annual CF = 1.87M
Add back Dep = 0.94M
So OCF = 2.81M
This is CF from Y1 to Y9.
In Y10, we have CF = OCF+After Tax Salvage = 2.81+4.28 =7.09
So We have NPV = CF0 + CF1...Cf10
= -12 + 2.81*PVA(9%,9) + 7.09*PV(9%,10)
= -12 + 2.81*5.9952 + 7.09*0.4604
=$8.11M
As NPV is Positive, we should ACCEPT the project
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