Oriole Company is considering buying a new farm that it plans to operate for10 years

Answer:

Initial investment in this case = $ 2.70 million for the land and $9.25 million for the trucks and other equipments

Life investment = 10 years as indicated in the question.

Cash proceed at the end of 10 years= $5.15 million

marginal tax rate = 35%

Appropriate discount rate= 9%

Step-by-step explanation

             Solution

Book value of thev investments at the end of 10 years=( cash proceed - profit)

   =( $5.15-$2.30)million

  = $2.85million

Depreciation=( value of initial investment- book value at the end of 10years)

         = $11.95million-$2.85million)

          = $9.1million

Therefore depreciation every year in this case= ($9.1/10)million

             =$0.91million

Revenue inflow per year=Expected revenue per year +annual cash flow for the opperation

     ( $2+$1.90) million

    =$3.90 million

After tax salvage value= cash proceed-(cash proceed-book value) * tax rate

      = $ 5.15million -($5.15million-$2.30million)*35%

         = $4.15million

Therefore PV=  after tax salvage/(1+r)ⁿ

                       in this case n is the number of years

                =$4.15/(1+0.09)¹⁰

              = $1.75million

            NPV= present value of cash flow - initial outlay

                     = $1.75 million-$11.95million

                      = -$10.2 million 

Since the NPV is negative , the company shlould not proceed with the investment