Corporate Finance: A Focused Approach (mindtap Course List)
Corporate Finance: A Focused Approach (mindtap Course List)
7th Edition
ISBN: 9781337909747
Author: Michael C. Ehrhardt, Eugene F. Brigham
Publisher: South-Western College Pub
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Chapter 4, Problem 22P
Summary Introduction

To Determine: The expected rate of return.

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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 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 $2million 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%, and the appropriate discount  rate is 10%. Calculate the NPV of this investment
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