|Posted: 07 Sep 2012 at 14:47 | IP Logged
Note that in the answer below, the Annual Interest Expense on factored A/R is 10% times the Monthly $80K, with no further annualization. I guess this is because they are saying, each month there is only an $80K net advanced amount which is multiplied against the 10% rate.
My question is, doesn't this assumption hinge on the 30 day avg collection period? If the question said collection was 20 days, then would the annual Interest Exp only be 2/3*$80k, assuming a 360 day year? If it said a 60 day period, would you double the interest expense collected? Seems like an important nuance.
A company enters into an agreement with a firm who will factor the company's accounts receivable. 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 percent of the face value of receivables at an annual rate of 10
percent and charge a fee of 2 percent 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. 12.0 percent.
b. 14.0 percent.
c. 16.0 percent.
d. 17.5 percent.
Choice "d" is correct. 17.5% annual cost of financing.
Amount of A/R Submitted $100,000
Amount Not Advanced (20,000)
Amount to Calculate
Interest Exp 80,000
Cost to Company 32,000
Less Collection Expense Saved (18,000)
Net Cost $14,000
Net cost $14,000
17.5% Annual cost of financing
Amt advance $80,000
FAR 8/2011: 86
AUD 11/2011: 93
Reg 2/2012: 71, 7/1/2012: 89
BEC 10/2012: TBD