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 $5.10 million, $2.34 million above book value. The farm is expected to produce revenue of $2.07 million each year, and annual cash flow from operations equals $1.93 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment.

NPV =

Should this project be rejected or accepted?

Explanation / Answer

CF0 = -$13,250,000
CF1 - 9 = $1,237,600
CF10 = $1,237,600 + $5,000,000 x 65%
CF10 = $4,487,600

I get the following NPV results using this online tool http://finance.thinkanddone.com/online-k...

NPV at 11.60%
DCF0 = -13250000/(1+11.60%)^0 = -13250000
DCF1 = 1237600/(1+11.60%)^1 = 1108960.57
DCF2 = 1237600/(1+11.60%)^2 = 993692.27
DCF3 = 1237600/(1+11.60%)^3 = 890405.26
DCF4 = 1237600/(1+11.60%)^4 = 797854.18
DCF5 = 1237600/(1+11.60%)^5 = 714923.10
DCF6 = 1237600/(1+11.60%)^6 = 640612.09
DCF7 = 1237600/(1+11.60%)^7 = 574025.17
DCF8 = 1237600/(1+11.60%)^8 = 514359.47
DCF9 = 1237600/(1+11.60%)^9 = 460895.59
DCF10 = 4487600/(1+11.60%)10 = 1497518.49
NPV = $-5,056,753.81

Since NPV is five million in the red, Archers Daniels Midland Company is better off not investing in this project

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