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nari says

Hello

In the bpp answer for the receivables cost , both the 80% advance and the 20% remainder are calculated using 1/12 BUT the questions says that the 80% is paid immediately while the 20% is paid a month later, so shouldn’t it be calculated using 1/12 for the 80% and 2/12 for the 20% since the remaining 20% would have been paid in the 2nd month?

johnmoffat says

I do not have the BPP answer, and so I do not know what they have done.

However there are several ways of setting out the workings – it does not matter as long as the final answer (i.e. the net cost or saving per year) is the same.

I think that they way I do it in my lecture is the easiest and most logical way (and the final answer is correct – the same final answer as the examiners). I am sure that BPP’s final answer (i.e. the net cost or benefit) must be the same also.

massivecodedake says

Hey John.Why the answer of this question (FMC 12/01) the one-off payment to factor is treated as25000*12%? why not just 25000?

johnmoffat says

Because it is only paid once whereas the other costs and saving occur each year. So they have just put the interest on the 25000 as a yearly cost.

massivecodedake says

I understand your explaination in the video.But I want to know whether this rule can be applied in all questions .THX

johnmoffat says

Every question is different. If it did happen again that there is a one-off cost like this then yes (the examiner has not had one again since this question )

Khadijah says

I have the same question as Yando so please tell me if that’s correct to do so or if not then please explain it

Thank you.

johnmoffat says

I answered Yando’s question immediately he/she asked it. The answer is just above his question.

(Incidentally, we are not always able to read the comments under each lecture – if you have a question that you want answered by a tutor then please use the relevant Ask the Tutor Forum.)

thorned says

For anyone who’d like to find this question online I found it here: http://www.docstoc.com/docs/69367055/F9-FinancialManagement-RevisionKit-BPP on page 36

sani19 says

sir ,

i have listen to your lectures and started doing the receivables calculations as you have explained ( very well explained )

that is compare costs and benefits .

in the same way i am doing this question in the kit but got wrong just because of bad debts calculations and come back to view it and the videos are not working .as you know tomorrow is the exam. i am really confused at this time and need your help .can you please please tell me in writing

what i have done is

on costs side

factor fee 90000

other payment 25000

cost of advancing ( 2250000 x 80% x 3 % ) 54000

total costs 169000

on benefits side

admin salary savings 22500

bad debts reduction( 2.5 x 90% x 3% less 2.5 x 90% x2%) 22500

reduction in receivables financing (281250 x 12% ) 33750

total benefit 68750

please tell me sir where i am wrong

johnmoffat says

There are a few errors:

The factor is offering a non-recourse facility. This means that the factor will suffer any bad debts – the company will not have any. So the saving in bad debts is the full 3% (not 3% – 2%).

Also, the other payment to the factor of 25,000 is a one-off payment – it will not occur every year and so you cannot include it with the annual costs and benefits.

What we have to do is assume that the one-off payment increases the overdraft and therefore the annual cost is the interest on this (12% x 25,000).

Finally, your cost of advancing is OK except that they are only advancing for 1 month but you have charged interest for a year. The cost should be 225,000 x 80% x 3% x 1/12 = 4500.

There is more than one way of setting all this out – BPP has set it out differently. However if you correct the three errors then you will end up with the same net benefit as the BPP answer.

sani19 says

Thank you sir thank you very much for your immediate reply

very well explained

you are the world’s best teacher .

johnmoffat says

You are welcome

johnmoffat says

There is more than one way of costing this sort of problem (although all ways give the same net cost or benefit) – I am doing it the way that I do it in my lectures on here (which I think is the easiest way )

However, what you have written is wrong, for two reasons.

We are charging the 80% advances at 15% p.a. because that is the rate of interest that the factor is charging.

The remaining 20% we are effectively financing ourselves from the overdraft and therefore the rate is 12%.

You could cost it out the way you are showing: 20% x 90% x 2.5M x 1/12 = 37500 x 12%

The reason I do not need to in the answer in my lecture is that currently we are financing all of the current receivables 468,750 ourselves using the overdraft at 12% interest. So instead of showing the cost of the current receivables and the cost of the new receivables separately, I have simply calculated the net saving (468740 – 37500) x 12%

I hope that makes sense

Yando says

John,

If we are costing the 80% immediate advance, shouldn’t we cost the remaining 20%? In my working I costed the remaining 20% as follows: 20%x90%x2.5mx15%x1/12. Would that be right?

Thanks