At the end of 2020, 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 secondhand 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 2020. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

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Net Cash Flow Probability Estimate Year Assessment $6,000 2021 40% 9,000 60% $ (500) 2022 20% 2,000 60% 20% 4,000 Scrap Value $ 500 2022 50% 900 50%