At the end of 2015, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations.

Given the nature of Sawyer’s production process, the equipment is for special use. (No second-hand market values are available.) The equipment will be obsolete in 2 years, and Sawyer’s accountants have developed the following cash flow information for the equipment.

Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2015. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

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Year 2016 Net Cash Flow Estimate Probability Assessment 6,000 40% 9,000 60% 2017 (500) 20% 2,000 60% 4,000 20% Residual Value 2017 500 50% 900 50%