Impairment cost


a bit puzzled with the below- where does the 13.8 mln come from?

Cheers, thanks

The following information is available for a company that prepares its financial statements in accordance with U.S. GAAP:

· It has production facilities with a net book value of $28.4 million.

· Recently, several other companies have entered the market, and the company now estimates that it will be able to generate cash flows of only $3 million per year for the next seven years with its facilities.

· The firm has a cost of capital of 10%.

The impairment loss (in $ millions) on the production facilities will most likely be reported in the company’s financial statements as a:

13.8 reduction in operating cash flows. 7.4 reduction in the balance sheet carrying amount. 13.8 impairment loss on the income statement. The company will report an impairment loss of $13.8 million on its income statement.Under U.S. GAAP the facilities fail the recoverability test–the net book value cannot be recovered from undiscounted cash flows: 7 years × $3 = $21 < $28.4. Therefore, the asset is impaired and should be written down to its fair value

PV@ 10% discount rate and 3 million cash inflows for seven years = 14.6 million

Book Value = $ 28.4

As PV of Benefits < Book Value, there is an impairment. Amount (impairment) = 28.4-14.6 = 13.8 which is nothing but the impairment loss.

So answer should be C.