Question

Ivanhoe Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.85 million. This investment will consist of $2.15 million for land and $9.70 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 $5.25 million, which is $2.00 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.)

Answer 1

PVIF@10% Present value Cash flow Year 1.000 $ (11.85) (11.85) 1 $ 2 $ 3$ 4 S 5 $ 6 $ 7 $ 8$ 9 $ 10 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ 0.621 $ 1.90 1.73 1.90 1.57 1.90 1.43 1.90 1.30 1.18 1.90 0.564 $ 0.513 $ 0.467 $ 0.424 $ 0.386 $ 1.90 1.07 1.90 0.98 1.90 0.89 1.90 0.81 6.45 2.49 -1.9+5.25-2*35% $1.58 Net present value Accept project

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