Question Details
The Heinrich Tire Company recalled a tire in its subcompact line
in December 2013. Costs associated with the recall were originally
thought to approximate $41 million. Now, though, while management
feels it is probable the company will incur substantial costs, all
discussions indicate that $41 million is an excessive amount. Based
on prior recalls in the industry, management has provided the
following probability distribution for the potential loss (FV of
$1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of
$1)(Use appropriate factor(s) from the tables
provided):
|
| Loss
Amount |
Probability |
| $31
million | 20% |
| $21
million | 50% |
| $11
million | 30% |
An arrangement with a consortium of distributors requires that
all recall costs be settled at the end of 2014. The risk-free rate
of interest is 5%.
|
Required: |
| 1. |
Applying the expected cash flow approach of SFAC No. 7,
estimate HeinrichAc??cs liability at the end of the 2013 fiscal year.
(Enter your answer in whole dollars.)
|
|
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DATE ANSWEREDDec 08, 2020
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