BACKGROUND:

Assume now that Frankies has finished construction of the new cheese superstore along Route 5 and capitalized $1.9 million related to the project as of the stores opening on 1/1/20X1. As of 12/31/X1, the current carrying value of the shop is $1.805 million (assuming a 20-year life for the store and straight-line depreciation). As of 12/31/X1, Frankies notices that a few negative factors are at play and asks you whether it is required to test the superstore for impairment: 1. A key stock market index (the Dow) has slid 1,500 points, or 6%, since the store was opened. 2. Monthly sales have slid by 10% since the store was opened, partially due to a construction project on Route 5 that has reduced traffic flow to the area. 3. As a result of the slide in monthly sales, the store operated at a deficit in October, November, and December of 20X1. Assume the fair value of the store at 12/31/X1 is $1.7 million. As of 12/31/X1, Frankies estimates the store will produce net cash inflows of $50,000 in year 2, $100,000 each in years 35, $150,000 each in years 610, $175,000 each in years 1115, and $200,000 each in years 1620. Note that Frankies incremental borrowing rate is 6%.Is the store required to be tested for impairment? Should Frankies impair the current carrying value of the store at 12/31/X1?

ANSWER:

As per IFRS an impairment losses is recognized when carrying value of asset is greater than recoverable amount.

The recoverable amount is greater of :

- Fair value less cost to sell

- Present value of future cash flow

The carrying value of asset provided is $1.805 B

Fair value of asset provided is $1.7 Billion

Present value of future cash flow works out to $1.6M

Since Fair value is greater than present value of future cash flow, $1.7B will be considered as recoverable amount.

Since carrying amoount of $1.805B is lesser than $1.7 Billion, Impairement loss of $0.105B needs to be recognised

Working note for future cash flow :

Year	Cash Flow
2	50,000.00
3	100,000.00
4	100,000.00
5	100,000.00
6	150,000.00
7	150,000.00
8	150,000.00
9	150,000.00
10	150,000.00
11	175,000.00
12	175,000.00
13	175,000.00
14	175,000.00
15	175,000.00
16	200,000.00
17	200,000.00
18	200,000.00
19	200,000.00
20	200,000.00
NPV	$1,608,781.30

MY QUESTION:

How is the NPV $1,608,781.30?