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 $11.90 million. This investment will consist of $2.20 million for land and $9.70 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 $5.18 million, $2.21 million above book value. The farm is expected to produce revenue of $2.07 million each year, and annual cash flow from operations equals $1.96 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 $11.90 million. This investment will consist of $2.20 million for land and $9.70 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 $5.18 million, $2.21 million above book value. The farm is expected to produce revenue of $2.07 million each year, and annual cash flow from operations equals $1.96 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.)

Explanation / Answer

Annual depreciation = (11.9-(5.18-2.21))/10 = 0.893

Annual Tax Expenses = (2.07-0.893)*35% = 0.41195

Annual Post tax cash flow from operation = 1.96-0.41195 = $1.54805 million

Post tAx salvage Value = 5.18-2.21*35% = $4.4065

NPV = 1.54805PVIFA(10%,10) +4.4065PVIF(10%,10) - 11.9

=1.54805*6.1446 + 4.4065*0.3855 -11.9

= - $689,146.22

Since the npv is negative the project should be rejected

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