[Luma196]

A company enters into an agreement with a firm who will factor the company’s A/R. The factor agrees to buy the company’s receivables, which average 100,000 per MONTH and have an average collection period of 30 days. The factor will advance up to 80% of the face value of the receivables at an annual rate of 10% and charge a fee of 2% on all receivables purchased. The controller of the company estimates that the company would save 18,000 in collection expenses over the year. Fees and interest are not deducted in advance. Assuming a 360 day year, what is the annual cost of financing?

a. 10% b. 14% c. 16% d. 17.5%

---

what am i doing wrong? it’s either there’s something wrong with the question or something wrong with me haha

---

Based on the question above, i can logically assume that the factor will buy ALL of the company’s receivables (100,000/month which means 1,200,000 per YEAR)

BUT the factor will advance 80% of the company’s receivables (960,000) at an annual rate of 10%==== 96,000

---

the factor will charge 2% on ALL receivables PURCHASED (100,000*12*.02)= 24,000

---

so 96000+24000-18000 (savings)= 102000

---

Annual cost of financing= 102000/ 1,200,000 (A/R per year)= 8.5%

---

that’s not even close to the answer choices……. and how about the discount as a result of factoring?!!! can we consider it cost of financing??? hmmm maybe … let’s see……. !! the discount is (20,000) * (12)= 240000 (YEARLY)

so 96000+24000+240000-18000= 342000

342000/1200000= 28.5% ……….. :’)

FAR: 77 (1st attempt)
AUD: 89 (1st attempt)
BEC: 80 (1st attempt)
REG: 80 (1st attempt)

[WeWillSee]

The answer should be:

Total A/R Sumbitted 100,000 * .02 * (360/30) = 24000

Factored Amt Subject to Interest 80,000 * (.10/12) * (360/30) = 8,000

Total Cost = (24,000 + 8,000) = 32000

Less Expense Saved = (18,000)

Net Cost = (32,000-18,000) = 14,000

Net cost/average amount advanced = (14,000/80,000) = 17.5%

[Luma196]

Thank you!! good simple steps… Don't know why i complicated it !!

FAR: 77 (1st attempt)
AUD: 89 (1st attempt)
BEC: 80 (1st attempt)
REG: 80 (1st attempt)

[gwigle]

Why would you take the annual interest rate of 10% and multiply it by 12? It's an annual rate, not a monthly rate. It seems like this answer implies they are paying the annual rate every month.

[Author]

Replies