9 P6-14 (Expected Cash Flows and Present Value) At the end of 2014, Sawyer Compa
ID: 2440626 • Letter: 9
Question
9 P6-14 (Expected Cash Flows and Present Value) At the end of 2014, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing opera- tions. Given the nature of Sawyer's production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer's accountants have developed the following cash flow information for the equipment. Net Cash Flow Estimate $6,000 9,000 $(500) 2,000 4,000 Probability Assessment 40% 60% Year 2015 2016 is 20% 60% 20% Scrap value S 500 2016 50% instructionsEE6-7 E6-12P6-7P6-14 Rubric (4)
Explanation / Answer
Solution:
Year
Cash flow estimate
Probability assesment
Expected cash flow
2015
6,000
40%
2,400
9,000
60%
5,400
$7,800
-500
20%
-100
2016
2,000
60%
1,200
4,000
20%
800
$1,900
Scrap value
2016
500
50%
250
900
50%
450
$700
?
Applying the formula for each cash flow:
Expected cash flow in 2015 = $7,800
Expected cash flow in 2016 = ($1,900 + $700) = $2,600
PV Year-2015 = $7,800 / (1+.06)^1 = $7,358
PV Year-2016 = $2,600 / (1+.06)^2 = $2,314
Total PV of the 2 cash flows = $7,358 + $2,314 = $9,672
Applying values from Table-2:
PV Year-2015 = $7,800 X 0.9434 = $7,358
PV Year-2016 = $2,600 X 0.8900 = $2,314
Total PV of the 2 cash flows = $7,358 + $2,314 = $9,672
Applying Excel formulas
Year-201 5 : $7,358
Year-2016 : $2,314
Total PV of the 2 cash flows = $7,358 + $2,314 = $9,672
Year
Cash flow estimate
Probability assesment
Expected cash flow
2015
6,000
40%
2,400
9,000
60%
5,400
$7,800
-500
20%
-100
2016
2,000
60%
1,200
4,000
20%
800
$1,900
Scrap value
2016
500
50%
250
900
50%
450
$700
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.