Asset Group: Carrying I\\Ielue Production Deoember 31, Remaining Facilities 2012 Life in there Actual Data Operating Cash Flows Operating income 2013 201-3 2015 2013 2014 2015 Electric cars $25,000,000 20 $45,000 $77,000 $98,000 $32,000 $43,000 3. 52000 Electric car chargers $ 4,000,000 10 $ 5,000 $19,000 $25,000 $ i8,000i $i15,000i $i12,000] The following table provides the annual yield on the risk-free rate expected over the next 20 years obtained from the U.S. Department of the Treasury. The CFO has engaged in discussions with investment bankers to determine what the appropriate risk premium would be for these facilities (analyzed and supported based on market data available for comparable companies). Based on these discussions. she believes that a risk premium of 8% to 12% should he added to the risk-free rate to reect a current discount rate. We! 1 2 3 4 5 5 2 8 9 10 11 12 13 14 15 16 1? 18 19 20 Yleidl'ihl' 0.12 0.2? 0.40 0.52 0.89 1.12 1.41 1.57 1,81 1.97 2.05 2.13 2.25 2.32 2,45 2.50 2.59 2.62 2.65 2.6? 'This represents the annual yield to maturity for each time period. Thus. for example. an investment held for 10 years would yield a [37% return per year. As the junior accountant, the CFO has asked you to provide her an analysis of the need for an impairment of the production facilities and the amount of impairment loss to be recorded, if any. Required N x For December 31, 2015, using your judgment, perform an analysis of the need for an impairment of the production facilities and the amount of impairment loss to be recorded> if any. In performing your analy- sis. you should use an Excel spreadsheet to support any calculations. Document your judgment in a draft memorandum format that yclu will provide to the CFO [not to exceed three pages}. Be sure to include specic references to the applicable guidance and qucte the applicable guidance. Also attach your Excel spreadsheet with your calculaticms. Background Toyda, Inc. (Toyda) is one of the world's leading car manufacturers. It sells cars escllslsirel},r in the United States. In recent years,To}rda has begun producing electric cars, as well as specialized equipment that is used to charge electric cars. Management ofToyda had been very optimistic about this recenti'enture. For internal purposes, Topda projected a growth rate of dll'io for the electric car production and for the production of the \"Reprinted from the Ernst Er'fotmg Academic Resource Center 1with permission of the Ernst alr'foung Foundation. Copyright ilill rights reserved. specialized equipment. Management believes that these estimates were conservative. Currently, Toyda is the only 1.1.5. carmaker that is producing electric cars. In December 21115, a number of oil reserves were discovered in Alaska. These oil reserves are much more signicant than any reserves that currently exist. U.S. consumers are euphoric over these discoveries. Accordingly. many automobile manufacturing companies and industry and government analysts believe that the demand for electric cars will decrease substantially. While the CEO is exceedingly worried about this new turn of events, she is not really worried about the nancial statements for the December 31, 2015 year-end. Because Toyda is still in the early stages of produc- ing and selling electric cars, most of the company's current net income is attributable to traditional cars. The current consensus analyst forecast for net income per share is $10.25, which equates to $311.11 million of net income. Although Toyda has not yet finalized its nancial statements for 215, the draft income statement provided to the CEO on February 1, 2016, showed net income of $35 million, an effective tax rate of 20%, and total assets of $500.1} million. Toyda is audited annually. The CPU at Toyda has been consulting with external valuation specialists since early December to determine if there is a need to impair one or both production facilities. Toyda is not considering a potential sale or an alternative use of its production facilities. The valuation specialists have extensive experience with the global automotive industry, including the electric car industry in Europe. The valuation Specialists issued their report on February 3, 21116. The report included an analysis of expected growth rates based on available market data, industry trends, historical results, and other pertinent data. The report indicated that Toyda will be able to maintain its expected growth rates for two more years, until the newly discovered oil reserves are ready to begin production. Beginning in 2013, Toyda Iwould expect growth rates betWeen 15% and 19% for the specialized equipment facility and the car production facility. The valuation specialists anticipate that Toyda will be able to dispose of the production facility for electric cars in 20 years, with proceeds of $5D0,Utl. Likewise, the production facility for the SpecialiZed equipment could be disposed of in 1%} years with proceeds of $1,. The valuation specialists also believe that the highest and best use of the facility is its current use and an expected present value technique (i.e., expected cash ows} would be the most appropriate method to make a fair value determination. The CFO has been heavily involved in the preparation and review of the valuation specialists\" report. and she believes it is a balanced and fair assessment. The table below provides data on the two facilities