JayJay Limited estimated that the future cash outflows relating to settlement of warranty obligations would be as follows:
In 1 year - $40 000.
In 2 years - $50 000.
In 3 years - $60 000.
A government rate for bonds with similar terms is 6%. What is the present value of the total expected future cash outflow?

Question

Quizplus · Accepted Answer

To calculate the present value of future cash outflows, we need to discount each cash outflow to its present value using the government rate of 6%.

PV1 = $40,000/(1+0.06)^1 = $37,735.85
PV2 = $50,000/(1+0.06)^2 = $43,116.44
PV3 = $60,000/(1+0.06)^3 = $51,760.85

Present value of total expected future cash outflow = PV1 + PV2 + PV3 = $37,735.85 + $43,116.44 + $51,760.85 = $132,612.14

Therefore, the best choice is A.

JayJay Limited Estimated That the Future Cash Outflows Relating to Settlement