Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10

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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 $12.10 million. This investment will consist of $2.90 million for land and $9.20 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.00 million, $2.41 million above book value. The farm is expected to produce revenue of $2.06 million each year, and annual cash flow from operations equals $1.96 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.
NPV = $ ??
HINT - This is a similar question. Some of the numerals are slightly altered, but the answer at the end is correct. I have no idea how this answer was calculated so I need help with the question above. Hopefully this sample question gives you an idea on how to calculate. "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 $12.10 million. This investment will consist of $2.20 million for land and $9.90 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.25 million, $2.11 million above book value. The farm is expected to produce revenue of $2.04 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent."
Correct Answer = 1,314,056.05
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Related Book For  book-img-for-question

Fundamentals of corporate finance

ISBN: 978-0470876442

2nd Edition

Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates

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