Question

Assume that Picnic Paper Co. has several minor lawsuits outstanding. To determine the amount of liability to recognize on the statement of financial position, Picnic decides to use expected cash flow techniques. Based on discussions with their lawyers, Picnic has developed the following cash flow estimates, and related probabilities:

Year Cash Flow Estimate Probability Assessment

2020 $2,300 30%

$4,500 45%

$8,200 25%

2021 $3,200 20%

$5,400 50%

$7,100 30%

Instructions

Based on these estimates, and assuming a risk-free rate of 5%, what is the present value of expected cash flows that Picnic should record on their statement of financial position for 2020?

Answer 1

Ans.	First of all, we need to calculate Expected cash flows for both years.
	Year 2020:
	Cash flow estimate (a)	Probability assessment (b)	Expected cash flow (a*b)
	$2,300	30%	$690
	$4,500	45%	$2,025
	$8,200	25%	$2,050
	Total expected cash flow		$4,765
	Year 2021:
	Cash flow estimate (a)	Probability assessment (b)	Expected cash flow (a*b)
	$3,200	20%	$640
	$5,400	50%	$2,700
	$7,100	30%	$2,130
	Total expected cash flow		$5,470
	*Now we need to find out the Present value factor @ 5%:
	Year		PV @ 5%
	1	1 / (1 + 0.05)^1	0.9524
	2	1 / (1 + 0.05)^2	0.9070
	*Finally we can calculate the present value of cash flows:
	Year	Total Expected cash flow (a)	PV @ 5% (b)	Present value of cash flows (a*b)
	2020	$4,765	0.9524	$4,538.10
	2021	$5,470	0.9070	$4,961.45
	Total Present Value of Cash Flows			$9,499.55