Question

Carla Vista 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 $2.90 million for land and $9.15 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 $2.20 million above book value. The farm is expected to produce revenue of $2.10 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

NPV

$ (enter the NPV in dollars rounded to 2 decimal places )

The project should be?

Answer 1

SOLUTION:-

Calculate the NPV of this investment.:-

Net salvage value = sale proceeds- tax rate*(sale proceeds-book value)

= 5000000-35%*2200000

= 4230000

Net present value(NPV) = initial cost+ present value of operating cash flows for 10 years+ the present value of net salvage value

NPV= -12050000+1900000*(1-1/(1+9%)^10)/0.09+ 4230000/(1+9%)^10

NPV= 1930347.35

Should the project be accepted or rejected?

The project should be accepted since NPV is positive.