Jentayu Ltd performs an impairment test of its cash-generating unit, which is a whole subsidiary. The carrying amount of a subsidiary, including allocated goodwill and working capital (current assets and current liabilities), is Ksh 150 000. It is not possible to determine its fair value less costs of disposal and therefore the parent determines the subsidiary's recoverable amount based on its value in use. At the end of 2010, the subsidiary reported the following results:

Ksh

Revenue from principal activities:

50,000

Fixed cost

25,000

Variable costs

15,000

Net profit before tax

10,000

Closing working capital

1,000 For the purpose of value in use calculation, the parent made the following assumptions: Assume the subsidiary will be sold off in the fifth year and the shareholders will ask for 10 times the cashflow in the fifth year. Their opening working capital for 2011 = Ksh 1241 and 5% of revenues henceforth. Based on information about the subsidiary's industry, the market expects the growth of 5% per year in average for the next 5 years, and then 2% in the long term. These rates are nominal and include the effect of inflation. Pre-tax discount rate determined based on company's cost of capital is 8% p.a. Based on past experience, the company assumes the annual replacement capital expenditure of Ksh 500 each year net of the inflation effect. Fixed costs are the same in real terms (hint: careful about the inflation!). They exclude depreciation and amortization. Variable costs are about 30% of the revenue. The assumed inflation rate is 1.5% p.a. for the next 10 years.

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Required:

Test for impairment (show all your workings)