The owner of a company is debating between factoring the accounts receivables of
ID: 2705734 • Letter: T
Question
The owner of a company is debating between factoring the accounts receivables of the company and investing the proceeds to invest in the stock market, or continue receiving the AR payments. If he factors the AR, the company can receive $69,438, current liablilities of the company are 32,850, assume he can get a return of 18% a year for 3 years.If he continues receiving payments he will receive the following cashflows year 1= 41,060, year 2 =29225, year 3= 13980. Assume operating costs are already deducted from the cashflows, current liabilities plus interest for 3 years would be 36482. Use NPV and IRR to evaluate what is the best option.
Should he continue receiving payments for three years or sell the AR and invest in the stock market for the next three years?
Please explain with details and calculations
Explanation / Answer
Factoring AR
NPV = $69,438-$32,850 = $36588
Receiving AR payments
NPV = $41,060/1.18 + $29225/1.18^2 + $13980/1.18^3 - $36482 = $27812.21
He should factor the AR, the cashflow while receiving AR payments is discounted at 18% as that is the return at which the money received after factoring the AR can be invested.
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