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 $12.05 million. This investment will consist of $2.15 million for land and $9.90 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.10 million, which is $2.30 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.80 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Explanation / Answer

Answer:

NPV $              666,129 The project should be acceptedrejected . Year Cashflow PV 0     (12,050,000)     (12,050,000) 1          1,800,000          1,636,364 2          1,800,000          1,487,603 3          1,800,000          1,352,367 4          1,800,000          1,229,424 5          1,800,000          1,117,658 6          1,800,000          1,016,053 7          1,800,000              923,685 8          1,800,000              839,713 9          1,800,000              763,376 10          6,095,000          2,349,886 NPV        666,129.22 As NPV is positive the project should be accepted After-tax Salvage value of the assets =          4,295,000

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