# Chapter 11: Cash Flows and Capital Budgeting FCF and NPV for a project: Archer Daniels Midland Company is considering buying a new farm that it plans…

Chapter 11: Cash Flows and Capital Budgeting
FCF and NPV for a project: 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 \$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.
Question:
Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling \$3 million and a 60 percent probability of revenues totaling \$1 million per year. Its cash expenses will be \$1.0 million while depreciation expense will be \$200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?