Question

Cullumber 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 $2.20 million for land and $9.85 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 $5.15 million, which is $2.50 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 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 $

Answer 1

Discounted value of cash flow from operations = 1,900,000 * PVAF (10%, 10 years) = 1,900,000 * 6.14456 = 11,674,677.5

Discounted value of sale of assets = [ 5,150,000 -(2,500,000*35%)] * PVF (10% ,10) = 4,275,000 * 0.38554 = 1648197.562

NPV = - 12,050,000 + 11,674,677.5+ 1648197.562

= 1,272,875.06