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 $12.10                     million. This investment will consist of $2.10 million for land and $10.00 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 $5.20 million, $2.26 million above book value. The farm is expected to produce revenue of                     $2.02 million each year, and annual cash flow from operations equals $1.84 million. The marginal tax rate is 35 percent, and the appropriate discount rate is                     10 percent. Calculate the NPV of this investment. PLEASE USE THE NUMBERS THAT ARE IN THE QUESTION I POSTED

Explanation / Answer

Annual depreciation = (12.1-(5.2-2.26))/10 = 0.916

Annual Tax Expenses = (2.02-0.916)*35% = 0.3864

Annual Post tax cash flow from operation = 1.84-0.3864 = $1.4536 million

Post tAx salvage Value = 5.2-2.26*35% = $4.409

NPV = 1.4536PVIFA(10%,10) +4.409PVIF(10%,10) - 12.1

= - 9.84 million

Since the npv is negative the project is not viable

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