In: Accounting
Weihong Corporation is about to emerge from a Chapter 11 reorganization. Assets of the emerging entity have a total book value of $3,000,000. Of these, assets with a book value of $600,000 are not needed to operate the emerging entity and will be sold for an expected price of $460,000. The remaining assets will be used in operations. Operations are expected to generate an annual net cash flow of $350,000. This amount is projected for the next five years; a discount rate of 10 percent is deemed appropriate. Required Calculate Weihong Corporation’s reorganization value. For convenience, assume the operating cash flows take place at the end of each year. Round your answer to the nearest whole number
PS: I already submitted this question but the answer was wrong, it is not 1786500
Reorganization value as on today will be sum of the following two amounts:
1. present value of annuity of $350,000 for 5 years
Y1 | Y2 | Y3 | Y4 | Y5 | Total |
350,000 | 350,000 | 350,000 | 350,000 | 350,000 | |
0.9091 | 0.8264 | 0.7513 | 0.6830 | 0.6209 | |
318,182 | 289,256 | 262,960 | 239,055 | 217,322 | 1326775 |
2. Present value of $ 450,000 = 450,000*.9091=418182
Total reorganization value = 1,744,957 (i.e. 1,326,775+418,182)