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Year End 20X3-X4 20X4-X5 20X5-X6 20X6-X7 20X7-X8 Value in Use
Quantity (5% increase p.a.) 10,000 10,500 11,025 11,576 12,155
Price per Unit (3% increase p.a.) 200 206 212 219 225
Estimated cash inflow 20,00,000 21,63,000 23,37,300 25,35,144 27,34,875
Misc. Cash inflow disposal proceeds 80,000
Total Estimated cash inflow 20,00,000 21,63,000 23,37,300 25,35,144 28,14,875
Cost per unit 160 162 165 168 171
Estimated Cash outflow -16,00,000 -17,01,000 -18,19,125 -19,44,768 -20,78,505

Misc. Cash outflow (Maint. Cost) -50,000
Total Est. Cash Outflow -16,00,000 -17,01,000 -18,69,125 -19,44,768 -20,78,505
Net Cash Flows 4,00,000 4,62,000 4,68,175 5,90,376 7,36,370
Disc. Factor 8% 0.9259 0.8573 0.7938 0.7350 0.6806
Discounted Future Cash Flows 3,70,360 3,96,073 3,71,637 4,33,926 5,01,173 20,73,169

Q5 (RTP May 20 & MTP OCT 20 – 5 Marks)
PQR Ltd. is a company which has performed well in the past but one of its major assets, an item of

equipment, suffered a significant and unexpected deterioration in performance. Management expects to use the
machine for a further four years after 31st March 20X6, but at a reduced level. The equipment will be
scrapped after four years. The financial accountant for PQR Ltd. has produced a set of cash-flow projections
for the equipment for the next four years, ranging from optimistic to pessimistic. The CFO thought that the
projections were too conservative and he intended to use the highest figures each year. These were as follows:

Rs ʼ000
st 276
Year ended 31 March 20X7
st 192
Year ended 31 March 20X8
st 120
Year ended 31 March 20X9

st 114
Year ended 31 March 20Y0
The above cash inflows should be assumed to occur on the last day of each financial year. The pre-tax
discount rate is 9%. The machine could have been sold at 31st March 20X6 for Rs 6,00,000 and related selling
expenses in this regard could have been Rs 96,000. The machine had been re-valued previously, and at 31st
March 20X6 an amount of Rs 36,000 was held in revaluation surplus in respect of the asset. The carrying

value of the asset at 31st March 20X6 was Rs 660,000. The Indian government has indicated that it may
compensate the company for any loss in value of the assets up to its recoverable amount.
Calculate impairment loss, if any and revised depreciation of asset. Also suggest how Impairment loss, if any
would be set off and how compensation from the government be accounted for?

Solution
Carrying amount of asset on 31st March 20X6 = Rs 6,60,000
Calculation of Value in Use:

Year ended Cash flow Rs Discount factor @ 9% Amount Rs
st 2,76,000 0.9174 2,53,202
31 March, 20X7

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