Aunt Tilly\'s Feeds, Inc. is considering obtaining funding through advances agai
ID: 2768309 • Letter: A
Question
Aunt Tilly's Feeds, Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment is made on the average of 30 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers factoring on a nonrecourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factors reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000 per year.
A. What is the effective interest rate and the average amount of funds available under pledging and under factoring?
B. Which plan do you recommend? Why?
Explanation / Answer
It is seen that factoring would be more beneficial considering the savings in credit and collection department closure. It is assumed that 1% factoring commission is a flat charge on total credit sale factored and 1.5% per month charge is considered on amount advanced. So the total cost will be 1% on 600000 + 1.5% on 510000.
Bank Finance Annual turnover 600000 Bank finance coverage 75% Bank finance coverage 450000 bank Interest 4875 Cost of finance per month 4875 Cash received on finance 445125 Net Collection 595125 Factoring Annual Turnover 600000 Factor reserve 15% Factored Value 510000 Non recourse cost 6000 Factoring commission 7650 Factoring Cost 13650 Savings in closing departments 10000 Net cost of factoring 3650 Cash received on factoring 496350 Net Collection including savings 596350 Bank Finance Annual turnover 600000 Bank finance coverage 75% Bank finance coverage 450000 bank Interest 4875 Cost of finance per month 4875 Cash received on finance 445125 Net Collection 595125 Factoring Annual Turnover 600000 Factor reserve 15% Factored Value 510000 Non recourse cost 6000 Factoring commission 7650 Factoring Cost 13650 Savings in closing departments 10000 Net cost of factoring 3650 Cash received on factoring 496350 Net Collection including savings 596350Related Questions
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