Value in use

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January 28, 2018 at 12:42 pm #433616
Simone
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Just wondered whether anyone can help me calculate the VIU in the question:

Given that the majority of paper production will now take place at the new site, the accountant is concerned that the value of the original paper mill may be impaired. The following indivation relates to the original paper mill as at 31 December 20X9:

Carrying value $2,800
Market value $3,000
Costs of disposal $400
Net cash flows from operations each year for the next 5 years $625

ScotPaper has a cost of capital of 10% and a five year annuity of $1 per annum at 10% would have a present value of $3.79

Thanks
January 28, 2018 at 8:02 pm #433664
Anonymous
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Value-in-use is the net present value of a cash flow.

This question makes it more simple by telling us that the present value of $1 p.a is $3.79.

Therefore, 625 multiplied by 3.79, is $2,368.75, which is your VIU.

You can round that number to $2,369.
January 31, 2018 at 2:13 pm #434228
Simone
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OK, so that’s yet another mistake in BPP’s text books. They gave the answer as 650 x 3.79. Spent ages trying to figure out where they got 650 from!!

Thanks for your help.
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