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 million. This investment will consist of $2 million for land and $10 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 million, which is $2 million above book value. The farm is expected to produce revenue of $2 million each year, and annual cash flow from operations equals $1.8 million. the marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. PLEASE RESPOND USING EXCEL AND SHOW HOW YOU GOT YOUR ANSWER.

Answer 1

Parameter		Value	Formula
Initial Cost		($12000000)
PV of Initial Cost		($12000000)
Annual Cashflows from operations =		$1800000
PV of Annual Cashflows		11060220.79	Annual Cashflow/discount rate* (1-1/(1+discount rate)^10)
Salvage value		$5000000
Tax on Value above Book Value		700000
Net Realisation from Sale		4300000
PV of Net realisation of Salvage value		1657836.145	Net realisation/(1+discount rate)^10
NPV =		718056.93	PV of annual cashflows + PV of Salvage value- PV of Initial Cost