Question

At the end of 2017, Tamarisk 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 Tamarisk’s production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Tamarisk’s accountants have developed the following cash flow information for the equipment.

	NET CASH	PROBABIL
YEAR	FLOW EST	ASSESSMENT
2018	6490	40%
	9470	60%
2019	-470	20%
	2140	60%
	4310	20%
	SCRAP VALUE
2019	470	50%
	960	50%

Using expected cash flow and present value techniques, determine the fair value of the machinery at the
end of 2017. Use a		4%	discount rate. Assume all cash flows occur at the end of the year. (Round factor
values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Fair value of the machinery at the end of 2017=

Answer 1

The fair value of machine at the end of 2017 is $10,518 and it is calculated as follows

Year	Cash Flows		Probability		Expected Cash flows	Total
Cash flows from machine use
2018	$6,490	×	40%	=	$2,596
	$9,470	×	60%	=	$5,682
Total expected cash flows					$8,278
× PV factor of $1 when n = 1 and i = 4%					0.96154
Present value of 2018 cash flows						$7,960
Cash flows from machine use
2019	($470)	×	20%	=	($94)
	$2,140	×	60%	=	$1,284
	$4,310	×	20%	=	$862
Total expected cash flows					$2,052
× PV factor of $1 when n = 2 and i = 4%					0.92456
Present value of 2019 cash flows						$1,897
Cash flows from scrap sales
2019	$470	×	50%	=	$235
	$960	×	50%	=	$480
Total expected cash flows					$715
× PV factor of $1 when n = 2 and i = 4%					0.92456
Present value of scrap						$661
Fair value of machinery at the end of 2017						$10,518