CFA Level I, Finan­cial Repor­ting and Ana­ly­sis, Long-Lived Assets, Reco­ver­a­ble Amount

A machi­ne is bought for €15,000, it has a use­ful life of five years. At the end of the second year, its fair value amounts to €7,000, the cost to sell are € 2,000. Its cash flows for the peri­ods 3, 4, and 5 are €3,000 each. Cal­cu­la­te with an inte­rest rate of 10 percent. 

The reco­ver­a­ble amount at the end of the second year is equal to

  1. €5,650.35
  2. €7,466.56
  3. €6,560,34

Solu­ti­on. B is correct. 

We com­pu­te

reco­ver­a­ble amount = max{ future value is sold minus cost to sell; value in use} 

= max{7,000 – 2,000 ; 3,000/1,1 + 3,000/1,1^2 + 3,000/1,1^3}

= max{5,000 ; 7,466.56}

= €7,466.56.  

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