MG670-144: Corporate Finance - Net Present Value Analysis

This assignment presents a Net Present Value (NPV) analysis for Archer Daniels Midland Company, evaluating the potential purchase of a new farm. The analysis calculates the present value of annual cash flows, considering a 10% discount rate and a scrap value at the end of the tenth year. The d...Read More

Running Head: NET PRESENT VALUE 1
NET PRESENT VALUE
(Archer Daniels Midland Company)

NET PRESENT VALUE
Capital budgeting is a wide terms and it involves different techniques that are use d y
the companies, which helps them in making a decision regarding the acceptance or rejection of
the proposal. Net present value is the value that displays the difference between the cash inflows
and the cash outflows. Net present value is one of the most important techniques which are being
used by almost every next company while analyzing the selection of proposals. In the present
scenario, Archer Daniels Midland Company is seeking to purchase a new farm which involves
land, truck and other equipment (Damodaran, 2016).
Net Present value
Annual Cash
flows Rate of Return @10% Net Present value
0
$
12,000,000.00
$
1.00
$
(12,000,000.00)
1
$
1,800,000.00
$
0.91 $ 1,636,363.64
2
$
1,800,000.00
$
0.83 $ 1,487,603.31
3
$
1,800,000.00
$
0.75 $ 1,352,366.64
4
$
1,800,000.00
$
0.68 $ 1,229,424.22
5
$
1,800,000.00
$
0.62 $ 1,117,658.38
6
$
1,800,000.00
$
0.56 $ 1,016,053.07
7
$
1,800,000.00
$
0.51
$
923,684.61
8
$
1,800,000.00
$
0.47
$
839,713.28
9
$
1,800,000.00
$
0.42
$
763,375.71
10
$
1,800,000.00
$
0.39
$
693,977.92
Scrap Value
$
4,300,000.00
$
0.39 $ 1,657,836.14
Net Present Value
$
718,056.93

NET PRESENT VALUE
Working Note 1
Salvage value Amount
Selling price $ 5,000,000.00
Book value $ 3,000,000.00
Net value $ 2,000,000.00
Less: tax $ 700,000.00
Total salvage value $ 4,300,000.00
The concept of net present value has been implemented to figure out whether the
company must seek to purchase farm or not. In every period, the cash flows are discounted by
another period of capital cost. Also, net present value determines the value of today and
considers it worthy enough than future value. The discounting rate is taken at 10% and the scrap
value is recorded at the end of the 10th year. After making the adjustment of net salvage value,
involving the treatment of tax as well, the net present value is $718056.93. The positive net
present value indicates the company must accept the proposal as it would be feasible for
potential growth and this will also increase the overall value of the company. It also implies that
revenue is greater than the costs incurred for taking this project. Hence, it is advised to Archer
Daniels Midland Company to purchase the farm as it would only give the company greater
returns and profits (Bora, 2015).

NET PRESENT VALUE
References
Bora, B., (2015). Comparison between net present value and internal rate of return. International
Journal of Research in Finance and Marketing, 5(12), 61-71.
Damodaran, A., (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.