At the end of 2008, Richards Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. Given the nature of Richard’s production process, the equipment is for special use. (No second-hand market values are available.) The equipment will be obsolete in 2 years, and Richard’s accountants have developed the following cash flow information for the equipment.

Instructions

Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2008. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

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Net Cash Flow Probability Year Estimate Assessment 2009 $6,000 40% 8,000 60% 2010 $ (500) 20% 2,000 60% 3,000 20% Scrap value 2010 $ 500 50% 700 50%