Clarise Ltd. is an artisan whiskey distillery. The company has three small-batch distilleries across Scotland and is considering what to do with their distilleries. The company has a cost of capital of 10% per annum and their management has given you the following information. Highlands' distillery: This is one of the company's oldest distilleries. The distillery generates sales of 45,000 a year on an annual cost base of 17,000. There is a small but steady market for Highland single malt that the company produces. The company's sales director is confident that the level of sales and cost base can be indefinitely maintained into the future. The accounting or net book value of the distillery is 200,000. The company has the option of disposing of this distillery immediately for 84,000 and it will cost 6,000 to do so. A similar distillery nearby has recently sold for 320,000

Islay distillery: This is the company's breadwinner. The distillery generates a contribution, net of costs, of 240,000 a year and is expected to do so for the next ten years. The machinery used also has an expected useful life of ten years, and can be sold for 600,000 at the end of its life. The accounting or net book value of the distillery is 800,000. If the distillery were to be disposed of in its current condition today, it would fetch 1,000,000 before transaction costs of 20,000. A similar distillery is currently on sale for 940,000.

Speyside distillery: The company has acquired this distillery as part of its merger with another distiller. The type of whiskey made is not a specialism of the company, and it is weighing up the various costs and benefits of disposing of the distillery. Currently, the distiller generates a contribution, net of costs, of 50,000 a year and can be expected to do so for five years. The machinery used has a similar useful life (five years), and can be sold for 230,000 at the end of its life. The accounting or net book value of the distillery is 470,000. If the distillery were to be disposed in its current condition today, it would fetch 400,000 before transaction costs of 10,000. A similar distillery is currently on sale for 435,000.

Required: a) What is deprival value and how can it be used in financial decision-making? 4 marks b) Calculate the deprival values of all three distilleries to the nearest 1. 12 marks c) On the basis of your answer in (b) and by stating any additional assumptions you have made, what do you think the company should do with each of the distilleries? 4 marks d) What are the challenges faced by users of corporate financial reports if deprival values were used to value non-current assets? 5 marks Total: 25 marks