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  1. Avatar of 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?

    • Avatar of John Moffat 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.

    • Avatar of John Moffat 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.)

  2. avatar 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

    • Avatar of John Moffat 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.

  3. Avatar of John Moffat 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 :-)

  4. avatar 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

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