At the end of 2020, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. 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. Year Net Cash FlowEstimate ProbabilityAssessment 2021 $6,000 40% 9,000 60% 2022 $ (500) 20% 2,000 60% 4,000 20% Scrap Value 2023 $ 500 50% 900 50% Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2020. Use a 6% discount rate. Assume all cash flows occur at the end of the year.
At the end of 2020, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. 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. Year Net Cash FlowEstimate ProbabilityAssessment 2021 $6,000 40% 9,000 60% 2022 $ (500) 20% 2,000 60% 4,000 20% Scrap Value 2023 $ 500 50% 900 50% Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2020. Use a 6% discount rate. Assume all cash flows occur at the end of the year.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 2P
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Question
At the end of 2020, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. 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.
| Year | Net Cash Flow Estimate |
Probability Assessment |
||
| 2021 | $6,000 | 40% | ||
| 9,000 | 60% | |||
| 2022 | $ (500) | 20% | ||
| 2,000 | 60% | |||
| 4,000 | 20% | |||
| Scrap Value | ||||
| 2023 | $ 500 | 50% | ||
| 900 | 50% |
Instructions
Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2020. Use a 6% discount rate. Assume all cash flows occur at the end of the year.
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