Question

Problem 10.20

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 $11.8 million. This investment will consist of $2.1 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 $5.0 million, which is $2.1 million above book value. The farm is expected to produce revenue of $2.03 million each year, and annual cash flow from operations equals $1.91 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations to 4 decimal palces, e.g. 0.5275 and final answer to 2 decimal places, e.g. 15.25.)

NPV

$

Answer 1

Initial Investment (A)	1,18,00,000
Annual Savings	19,10,000
PVIFA @ 10% for 10 Yrs	6.1446
PV of Annual Savings (B)	1,17,36,186
Sale Value at the end of 10 Years	50,00,000
Tax on Gain of $ 2100000	735000
Sale Proceeds net of Tax	42,65,000
PVIF @ 10% for 10th year	0.3855
PV of net Sale Proceeds (C)	16,44,158
Total PV of Cash Inflows (D) = (B) + (C)	1,33,80,343.50
Net Present Value = (D) - (A)	15,80,343.50