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 $2.90 million for land and $9.10 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 $5.16 million, $2.32 million above book value. The farm is expected to produce revenue of $2.04 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. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.) NPV $ The project should be accepted rejected .

Explanation / Answer

NPV = 1.93*PVIFA(10%,10)+ (5.16 - 2.32*0.35)PVIF(10%,10) -12

NPV = 1.93*6.1446 + 4.2985* 0.3855 -12

= $1.51614975 MillionAs NPV is Positive, we should ACCEPT the project

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