Question
11.21 FCF and NPV for a project: Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years.
11.21 FCF and NPV for a project: 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 million. This investment will consist of $2 million for land and $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 million, which is $2 million above book value. The farm is expected to produce revenue of $2 million each year, and annual cash flow from operations equals $1.8 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the Net Present Value NPV of the investment we need to determine the Free Cash Flow FCF for each year and then discount these cash flows ...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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