Assume that Jimmy\'s Submarine Ltd. has several minor lawsuits outstanding. To d

Question

Assume that Jimmy's Submarine Ltd. has several minor lawsuits outstanding. To determine the amount of liability to recognize on the statement of financial position, Jimmy decides to use expected cash flow techniques. Based on dicussions with their lawyers, Jimmy has developed the following cash flow estimates, and related probabilities:

Required: Based on these estimates, and assuming a risk free rate of 5%, what is the present value of expected cash flows which picnic should record on their statement of financial position for 2017?

Year Cash Flow Estimate Probability Assignment 2017 $2,300 30% $4,500 45% $8,200 25% 2018 $3,200 20% $5,400 50% $7,100 30%

Explanation / Answer

Calculation of expected cash flow during 2017

Calculation of expected cash flow during 2017

Discount rate = 5%

Hence, present value of cash flows to take place in 2018 = Expected cash flows in 2018 x Present value factor (5%, 1)

= 5,470 x 0.952

= $5,207

Hence, expected cash flows to be shown in the statement of financial position of 2017 = Expected cash flows in 2017 + Present value of expected cash flows in 2018

= 4,765 + 5,207

= $9,972

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubts. Thanks.

Cash flow estimate (i) Probability (ii) Expected cash flow (i) x (ii) 2,300 30% 2,300 x 30% = 690 4,500 45% 4,500 x 45% = 2,025 8,200 25% 8,200 x 25% = 2,050 Total = $4,765

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