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 $2.55 million for land and $9.45 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 $5.00 million, which is $2.35 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.95 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Answer 1

Calculation of NPV												(in $ million)
Year	0	1	2	3	4	5	6	7	8	9	10	NPV
Initial Investment	-$12.00
Salvage value of investment											$5.00
Tax on Gain ($2.35 million * 35%)											-$0.82
Cash flow from Operations		$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95
Net Cash flow	-$12.00	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$6.13
x Discount Factor @ 10%	1.00000	0.90909	0.82645	0.75131	0.68301	0.62092	0.56447	0.51316	0.46651	0.42410	0.38554
Present Value	-$12.00	$1.77	$1.61	$1.47	$1.33	$1.21	$1.10	$1.00	$0.91	$0.83	$2.36	$1.59
NPV of the Investment =	$1.59	million