Question

Whispering 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, Whispering 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 Whispering'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 Probability Assessment Estimate $388,100 20% 645,300 50% 759,100 30% Click here to view factor tables (a) What is the estimated fair value of the trade name? Whispering determines that the appropriate discount rate for this estimation is 9%. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Estimated fair value Click if you would like to Show Work for this question: Open Show Work

Answer 1

Solution:

Expected annual cash flows = ($388,100*20%) + ($645,300*50%) + ($759,100*30%)

= $628,000

Estimated fair value = Present value of expected cash flow = $628,000 * Cumulative PV Factor at 9% for 9 periods

= $628,000 * 5.99525

= $3,765,017