Question

Chris's Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2020, Chris sold $325,700 of new specialty mowers for golf greens for which Chris's service department does not have the equipment to do the service. Chris has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2020. Chris wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2020. The controller for Chris's Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2020. Year Cash Flow Estimate Probability Assessment 2021 $2,540 3,820 5,180 20% 60% 20% $2,990 4,540 5,780 $4,010 6,580 7,670 30% 40% 30% Click here to view factor tables Using expected cash flow and present value techniques, determine the value of the warranty liability for the 2020 sales. Use an annual discount rate of 6%. Assume all cash flows occur at the end of the year. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to o decimal places, e.g. 458,581.) The value of the warranty liability for the 2020 sales

Answer 1

	Value of warranty liability:
	Year	Expected cash flow					Discount factor at 6%	Discounted cash flow
	2021	(2540*0.20)+(3820*0.60)+(5180*0.20)				3836	0.94340	3618.86792
	2022	(2990*0.30)+(4540*0.50)+(5780*0.20)				4323	0.89000	3847.45461
	2023	(4010*0.30)+(6580*0.40)+(7670*0.30)				6136	0.83962	5151.90392
	Total							12618.2265
	Value of warranty liability=$ 12618