Question 6 [5 pts]

At the end of 2060,Abbott Lab added a new production capacity to its cardiovascular devices. The new production line, ABT-2060, required an investment cost of $30 million and had auseful life of 10 years with no salvage value. In Dec. 2065, the industry-wide declining demand has prompted the firm to conduct an asset impairment test for the production line ABT-2060. Answer questions (a) and (b) below. (Lecture notes, pp.5355)

Suppose the CFO has estimated that ABT-2060 can generate a cash flow of $4 million per year for the remaining life of 5 years from 20662070. Determine whether the firm should recognize an asset impairment.

Answer(show the steps/calculation toward your results):

Suppose instead that ABT-2060 can generate a cash flow of $2 million per year for the remaining life of 5 years. Additionally, assume an applicable discount rate is 10%. Compute the fair value of the ABT-2060 and the asset impairment loss to be reported on the income statement.

*You can use the annuity formula below, or financial calculator, to compute the present value.

Annuity formula: C1+r+C1+r2++C1+rT=Cr1-11+rT

Answer (show the steps/calculation toward your results):

Question 8 [5 pts]

Complete the following statements. (selected topics from Section #2)

If a firm has tangible fixed assets of $52 million, accumulated depreciation of $40 million, and annual depreciation of $6 million, the estimated remaining asset life is (i) years. The managers choice of asset useful lives can easily bias firms earnings because the longer a useful life is, the lower are (ii) expenses.

Answer: