Problem 11.20 Forecasting Cash Flows 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 is expected to be sold at the end of 10 years for a price of $5 million, $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.

Forecasting Cash Flows 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 is expected to be sold at the end of 10 years for a price of $5 million, $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. Estimate the present value of the cash flows related to this investment. Hint: Calculate the present value of the project cash flows using the information given and the template below. \begin{tabular}{|} Initial Investment: \\ \hline Annual Investment to Refurbish: \\ \hline Project Life (years): \\ \hline Estimated Salvage Value: \\ \hline Book Value (at end of project life): \\ \hline Marginal Tax Rate: \\ Discount Rate: \\ \hline Year 0 & Years 1-10 \\ \hline Initial Investment: \\ \hline CF from Operations: \\ \hline Terminal CF: & \\ \hline \end{tabular} PV of Cash Flow