Question

Oriole Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.10 million. This investment will consist of $2.00 million for land and $10.10 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 $5.00 million, which is $2.40 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.85 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

Sale price			5,000,000
Profit/(Loss)			2,400,000
Tax @ 35%			(840,000)
Sale price after tax			4,160,000
Calculation of NPV
						10.00%
Year		Captial	Operating cash		Annual Cash flow	PV factor	Present values
0		(12,100,000)			(12,100,000)	1.000	(12,100,000.00)
1			1,850,000		1,850,000	0.909	1,681,818.18
2			1,850,000		1,850,000	0.826	1,528,925.62
3			1,850,000		1,850,000	0.751	1,389,932.38
4			1,850,000		1,850,000	0.683	1,263,574.89
5			1,850,000		1,850,000	0.621	1,148,704.45
6			1,850,000		1,850,000	0.564	1,044,276.77
7			1,850,000		1,850,000	0.513	949,342.52
8			1,850,000		1,850,000	0.467	863,038.65
9			1,850,000		1,850,000	0.424	784,580.59
10		4,160,000	1,850,000		6,010,000	0.386	2,317,115.17
					Net Present Value		871,309.23