Sunland 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. (Do not round factor
values. Round final answer to 2 decimal places, e.g.
15.25.)
NPV |
The project should be |
NPV = $(590,344.52)
The project should be Rejected.
Because it does not give the required return of 10%
Working:
Discount factor Formula :
Where i = required rate of return
n= number of periods
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