Question

Buffalo 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, Buffalo 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 Buffalo'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 Estimate Probability Assessment $ 384.600 20% $ 633.200 50% $ 758,000 30% (a) What is the estimated fair value of the trade name? Buffalo determines that the appropriate discount rate for this estimation is 96. (Round factor values to decimal places, eg. 1. 25124 and final answer to decimal places, eg. 458,581) Estimated fair value

Answer 1

To estimate the fair value of the trade name, Buffalo Company needs to calculate the present value of the cash flow estimates and then select the estimated cash flow with the highest probability assessment. The estimated fair value of the trade name is $1,611,829.49.

Step-by-step explanation:

To estimate the fair value of the trade name, Buffalo Company needs to calculate the present value of the cash flow estimates and then select the estimated cash flow with the highest probability assessment. Using the present discounted value (PDV) method, the present value of each cash flow estimate can be calculated as follows:

1. For the cash flow estimate of $384,600 with a probability assessment of 20%, the present value would be $384,600 / (1 + 0.96)^1 = $349,175.83.
2. For the cash flow estimate of $633,200 with a probability assessment of 50%, the present value would be $633,200 / (1 + 0.96)^1 = $574,358.59.
3. For the cash flow estimate of $758,000 with a probability assessment of 30%, the present value would be $758,000 / (1 + 0.96)^1 = $688,295.07.

To calculate the estimated fair value, sum up the present values of each cash flow estimate: $349,175.83 + $574,358.59 + $688,295.07 = $1,611,829.49.

Therefore, the estimated fair value of the trade name is $1,611,829.49.