Question

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 $12 million. This investment will consist of $2 million for land and $10 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 $ million, which is $2 million above book value. The farm is expected to produce revenue of $2 million each year, and annual cash flow from operations equals $1.8 million. the marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

PLEASE RESPOND USING EXCEL AND SHOW HOW YOU GOT YOUR ANSWER.

Answer 1

Initial Investment: $2 million for land and $10 million for trucks and other equipments
Life of Investment: 10 years
Cash proceeds of the investments at the end of 10 years: $5 million
Book value of the investments at the end of 10 years: Cash proceed – profit = $5 million - $2 million = $3 million
Depreciation: value of initial investment – book value at the end of 10 years =
$12 million-$3million=$9 million
Therefore, Depreciation charged every year = $9 million / 10 years = $0.9 million
Marginal tax rate: 35%
Appropriate discount rate: 10%
Revenue inflows per year: Expected revenue per year + annual cash flow for operation =
$2 million + $1.8million = $ 2.8 million
After-tax salvage value: Cash proceed – (Cash proceed – book value)*tax rate =
$5 million – ($5million - $3million)*35% = $5million - $2million*35% = $5million – $0.7 million =
$4.3 million
Discount=∑ 1/〖(1+10%)〗^n, where n= number of years

Solution:-
All amounts are in million USD.