Question

Metlock Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of $3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Metlock must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Metlock’s estimate of annual cash flows over the next 9 years. The trade name is assumed to have no salvage value after the 9 years. (Assume the cash flows occur at the end of each year.)

Cash Flow Estimate			Probability Assessment
$380,700			20%
646,400			50%
754,600			30%

(a) What is the estimated fair value of the trade name? Metlock determines that the appropriate discount rate for this estimation is 9%. (Round factor values to 5 decimal places and final answer to 0 decimal places)

Estimated fair value

$

Answer 1

Answer
Cash flow estimate	Probability	Probable Cash flow
$                                                      380,700	20%	$                      76,140
$                                                      646,400	50%	$                    323,200
$                                                      754,600	30%	$                    226,380
Total		$                    625,720
Cash flow estimate	$                                625,720
X PV factor	1.107667809	(1-(1.9)^-9)/0.9
Estimated fair value	$                                693,090