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 $5\%.$ Assume all cash flows occur at the end of the year.

P$6\mathrm{.}14($LO $4,5)($Expected Cash Flows and Present Value$)$ 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.

Year

$$

Net Cash Flow

Estimate

$$ Probability

Assessment

$2021$

$$

$$6,000$

$$

$40\%$

$9,000$

$60\%$

$2022$

$ $(500)$

$20\%$

$2,000$

$60\%$

$4,000$

$20\%$

Scrap Value

$2023$

$$500$

$50\%$

$900$

$50\%$

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.