Question

CF and NPV for a project: Midland Ltd is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12,000,000. The investment will consist of $2,000,000 for land and $10,000,000 for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years at a price of $5 million, $2 million above book value. The farm is expected to produce revenue of $1,800,000 each year, and an after tax annual cash flow from operations of $1,551,600. The tax rate is 35 percent, and the appropriate discount rate is 13.80 percent. NPV = $________

Answer 1

**Tax on Gain = 2,000,000*.35= 700,000

After tax sale value =sale value -Tax

                             = 5,000,000- 700,000

                          = $ 4,300,000

Present value of cash flow =[PVA13.80%,10*annual cash flow] +[PVF13.80%,10*After tax sale value]

        =[5.25709* 1,551,600 ]+[.27452*4300000]

        = 8156900.84+ 1180436

        = 9,337,336.84

NPV=present value -Initial cost

     = 9337336.84- 12000000

     = -2,662,663.16

**find present value factor and present value annuity factor using financial calculator