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 $2.80 million for land and $9.20 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 $5.22 million, $2.14 million above book value. The farm is expected to produce revenue of $2.02 million each year, and annual cash flow from operations equals $1.92 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent.

Explanation / Answer

15.17434

So the project should be accepted as it has positive NPV.

Initial investment -12 Terminal cash flow 1.8886 (1000*D.F. @ 8.6%,17) (5.22- 0.35*2.14)*(D.F. @ 9%,10) Annual cash flow 25.28574 (2.02+1.92)*(A.F. @ 9%,10) NPV

15.17434

So the project should be accepted as it has positive NPV.

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