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I am referring to the previous threat:
https://opentuition.com/topic/impairment-of-assets-13/
1.In the question it says,
(a) A machine has a carrying amount of $85,000.
(b)A new machine would cost $150,000. The company which owns the machine expects it to produce net cash flows of $30,000 per annum for the next three years.Therefore, this cash flow relates to the new machine and not the old one. Therefore, why this $30,000 has been used?
“A new machine would cost $150,000”
The old machine – the subject of everything that has gone before this sentence – was acquired with an estimated useful life of 20 years
Ask yourself, is it really likely that a new machine of the same description would have a life of only 3+ years? It would cost $150,000 today and generate $30,000 for the next three years and, at that rate, would require 6 years 8 months to generate a present value equating to its cost (6 years at $30,000 per annum and a cost of capital of 8% aggregates to $138,685)
The question also states “The company which owns the machine expects it to produce net cash flows of $30,000 per annum for the next three years.”
This can only relate to the company that owns the old machine – not the company that owns the new machine – how could they possibly know what the net cash flow would be in the ownership of a new company?
I sympathise with you and agree that the question could have been more clearly written, but I feel that my interpretation is more probable than yours
Sorry 🙁
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