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 $12.15 million. This investment will consist of $2.85 million for land and $9.30 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 $5.20 million, which is $2.30 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.95 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

Answer 1

Calculation of NPV of Investments (in Millions)
Year	0	1	2	3	4	5	6	7	8	9	10	NPV
Initial Investment (land,trucks and equipments)	-$12.15
Cash flow from Operations		$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95
Sale of land,trucks and equipments											$5.20
Tax on Gain from sale @ 35% [$2.30 x 35%]											-$0.81
Net Cash flow	-$12.15	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$1.95	$6.35
x Discount Factor @ 10%	1	0.909091	0.826446	0.751315	0.683013	0.620921	0.564474	0.513158	0.466507	0.424098	0.385543
Present Values	-$12.15	$1.77	$1.61	$1.47	$1.33	$1.21	$1.10	$1.00	$0.91	$0.83	$2.45	$1.53
NPV of the investment =	$1,526,369