Parrino, Essentials of Corporate Finance, 1e Help I System Announcements PRINTER
ID: 2657765 • Letter: P
Question
Parrino, Essentials of Corporate Finance, 1e Help I System Announcements PRINTER VERSION BACK NEXT 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 $12.1 million. This investment will consist of $2.3 million for land and $9.80 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 $5.3 million, which is $2.4 million above book value. The farm is expected to produce revenue of $2.09 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 The project should be Click if you would like to Show Work for this question:Explanation / Answer
Answer )
NPV = PV ( cash inflows) - cash ouflow
Some highlights in questions ,
The farm expected revenue = $ 2.9 millions/year but cash flow from operation = $1.91 million, indicacte the cash inflow after net of all expanses and depreciation .
NPV calculation below,
NPV = ($ 3.745) Million
The project should be rejected ( as NPV < 0)
Net Cash Flow Y0 1 2 3 4 5 6 7 8 9 10 Net Capital Costs Land $2.3 Equipment $9.8 $ - Total Capital ($12.1) Cash Flow Before Taxes ($12.1) $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 Benefit from selling of equipment $2.90 Net cash flow before tax $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $1.91 $4.81 Income Tax ($0.669) ($0.669) ($0.669) ($0.669) ($0.669) ($0.669) ($0.669) ($0.669) ($0.669) ($1.684) Net cash flow after tax $1.24 $1.24 $1.24 $1.24 $1.24 $1.24 $1.24 $1.24 $1.24 $3.13 PV (Net Cash Flow after Tax) $1.129 $1.026 $0.933 $0.848 $0.771 $0.701 $0.637 $0.579 $0.527 $1.205 NPV ($3.745) Discounting rate 10% Tax rate 35%