Pace Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the bad debt allowance needed to cover the notes outstanding over the next four years. Estimated lost cash flows and the probability of occurrence for each of the next four years are summarized in the following schedule. The risk-free rate is 3% .
Pace Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the bad debt allowance needed to cover the notes outstanding over the next four years. Estimated lost cash flows and the probability of occurrence for each of the next four years are summarized in the following schedule. The risk-free rate is 3% .
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 2CE
Related questions
Question
Pace Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the
Begin by computing the estimated cash flow loss each year. (Enter all amounts as positive amounts.)
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Projected Cash Flow
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Expected
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|||
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Loss from Uncollected
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Probability of
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Cash Flow
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|||
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Year
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Notes
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Loss Occurring
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Loss
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2023
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$9,000
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65
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%
|
|
|
|
20,000
|
35
|
%
|
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||
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Total expected cash flow loss in 2023
|
|
||||
|
2024
|
$15,000
|
20
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%
|
|
|
|
26,000
|
45
|
%
|
|
||
|
65,000
|
35
|
%
|
|
||
|
Total expected cash flow loss in 2024
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|
||||
|
2025
|
$5,000
|
85
|
%
|
|
|
|
19,000
|
15
|
%
|
|
||
|
Total expected cash flow loss in 2025
|
|
||||
|
2026
|
$24,000
|
40
|
%
|
|
|
|
32,000
|
60
|
%
|
|
||
|
Total expected cash flow loss in 2026
|
|
Part 2
Now compute the estimated bad debt allowance for each year and the total. (Use the present value and future value tables, the formula method, a financial calculator, or a spreadsheet for your calculations. If using future and present value tables or the formula method, use factor amounts rounded to five decimal places, X.XXXXX. Round intermediary currency computations and your final answer to the nearest cent, $X.XX.)
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Projected
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|
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Cash Flow
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|
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Year
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Losses
|
|
2023
|
|
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2024
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|
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2025
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2026
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Total
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Part 3
What is the estimated bad debt allowance at December 31,
2022?
(Round your final answer to the nearest cent, $X.XX.)|
The estimated bad debt allowance at December 31, 2022 is
|
|
.
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