Sam Houston Company owns a trade name that was purchased in an acquisition of Travis Company. The trade name has a book value of $10,000,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Houston must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Houston’s estimate of annual cash flows over the next 6 years. The trade name is assumed to have no residual value after the 6 years. (Assume the cash flows occur at the end of each year.)

Probability

Cash Flow Estimate Assessment

$1,000,000 ............30%

1,600,000 ............50%

2,100,000 ............20%

Instructions

(a) What is the estimated fair value of the trade name? Houston determines that the appropriate discount rate for this estimation is 4%. Round calculations to the nearest dollar.

(b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.