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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
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.
Thank you sir thank you very much for your immediate reply
very well explained
you are the world’s best teacher .
You are welcome
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
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?
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