Question

Ivanhoe Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.85 million. This investment will consist of $2.15 million for land and $9.70 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 $5.25 million, which is $2.00 million above book value. The farm is expected to produce revenue of $2.10 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. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

Answer 1

The  NPV of this investment if the discount rate is 10 percent is: 1.58%.

Net present value (NPV)

Year Cash flow  PVIF 10%  Present value

0         ($11.86)     1.000           ($11.86)

1           1.90          0.909           $1.73

2          1.90          0.826           $1.57

3          1.90           0.751           $1.43

4          1.90           0.683          $1.30

5          1.90           0.621           $1.18

6          1.90           0.564          $1.07

7          1.90            0.513          $0.98

8          1.90           0.467          $0.89

9          1.90           0.424          $0.81

10         6.45          0.386         $2.49

NPV                                          $1.58

1.9+5.25-2×35%=6.45

Hence, the NPV is $1.58.

Learn more about NPV here:brainly.com/question/17185385

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