Determining appropriate discount rate


Archers 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 $10,000,000. The investment will consist of $2,000,000 for land and $8,000,000 for trucks and other equipments. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years at a price of $5 million, $2 million above book value. The farm is expected to produce revenue of $1,800,000 each year, and an after tax annual cash flow from operations of $1,580,400. The marginal tax rate is 35 percent, and the appropriate discount rate is 12.20 percent. NPV = $

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Finance Basics: Determining appropriate discount rate
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