# Expected Cash Flows and Present Value

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At the end of 2007, 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 secondhand 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.

Net Cash Flow Probability

Year Estimate Assessment

2008 $6,000 40%

8,000 60%

2009 ($500) 20%

2,000 60%

3,000 20%

Scrap value

2009 $500 50%

700 50%

Instructions

Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2007. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

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##### Solution Summary

This solution contains step-by-step calculations in an Excel file to determine the fair value of the machinery at the end of 2007 using expected cash flow and present value techniques.

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