Killroy Company owns a trade name that was purchased in an acquisition of McClel
ID: 2446352 • Letter: K
Question
Killroy 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, Killroy 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 Killroy’s estimate of annual cash flows over the next 11 years. The trade name is assumed to have no salvage value after the 11 years. (Assume the cash flows occur at the end of each year.) What is the estimated fair value of the trade name? Killroy determines that the appropriate discount rate for this estimation is 11%. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Cash Flow Estimate
Probability Assessment
Cash Flow Estimate
Probability Assessment
$372,500 20 % 641,000 50 % 768,600 30 %Explanation / Answer
Esxpected cash flow anually = 372500*0.20+641000*0.50+768600*0.30 i.e 625580
Present Value of the cash flows = Annual Cash Flows * PVAF ( 11%,11 Years)
= 625580* 6.2065 i.e 3882662
Estimated fair value = 3882662
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