Hiteck 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 two years are summarized in the following schedule. The risk- free rate is 8%.

Projected Cash low Loss from Uncollected Notes Probability of Loss Occurring 90% 10% Yoar 2016 S 8,000 18,000 $10,000 22,000 45,000 15% 70% 15% 2017 $ 6,000 14,000 85% 15% 2018 2019 526,000 35,000 50% 50%