What the examiners answer has is a reduction in finance cost of $76,200 p.a. and extra interest payable on advances of $49,184. So a net saving there of 76,200 – 49,184 = 27,016.

On your approach, the cost of financing receivables currently is 4,600,000 x 5% = 230,000
The new cost of financing receivables is (as per your workings above) 202,880.

A net saving of 230,000 – 202,880 = 27,120.

(The difference is purely due to roundings and is irrelevant)

So the final answer would be the same. Stick to the method you are happy with and you will get the marks.

With regard to non-recourse factoring (as is the case in this question) it simply means that the company is guaranteed not to suffer any bad debts. Currently there are bad debts of 350,000 per year, and since in future there will be none this is an extra saving from factoring.

You can be asked to explain the use of futures and options, but you cannot be asked calculations.

they have calculated axtra interest cost on advance 3073973*80%8 (7%-5%)…. why have we taken the difference of 7 and 5 to calculate extra interest what i was doing was 3074*80%*7%=172.14
3074*20%*5%=30.74

what will be the effect of factoring on a non recourse basis??

When we find that there is not enough capital to invest in a project in full, then we invest as much as we can in that project.

For example, suppose we have $10,000 available in total.

We decide to invest in Project A first which needs $4,000. No problem – we do A in full and have $6,000 left.
Suppose the next best is Project B which needs $5,000. No problem – we do B in full as well, and now have $1,000 left.
Suppose the next best is Project C which need $4,000. We only have $1,000 capital available and so we will invest in 1/4 (25%) of Project C ($1,000 out of a total of $4,000).

If you have not watched it already, then my lecture on here about Capital Rationing might help you.

With regard to the left over capital when the projects are not divisible, the answer is that if you cannot use all the capital available then you do not borrow it!! There is no point in borrowing money (and paying interest) if there is nowhere to invest it.

Even if we have cash in the bank, the cash is effectively still being borrowed – the shareholders are entitled to it as dividend and so by keeping it we are effectively borrowing from shareholders.
If we have nowhere to invest the cash, then we should give it to shareholders as dividend. (And this occurs in practice – the company should only keep cash if they have somewhere to invest it (or expect to be able to invest it in the future) – if not then they should pay it to shareholders.
(Not for the exam, but Apple has lots of cash that they are doing nothing with at the moment. That is why there has been pressure from shareholders to pay it out as dividend, and that is why Apple has decided to pay more dividend!!)

In question no. 34, Basril, from kaplan revision kit. the PI is calculated taking PV of the savings divided by investment. but the formula of PI in the book is given NPV divided by Investment.

the left over capital is also not utilised as according to text book, why ? as the left over capital need to be multiplied by PI, its not done in revision kit.

If we assume that the advertising occurs at the beginning of the first year (time 0) then it will only be at the end of the year that the taxable profits, and therefore the tax, is calculated. It is then another year before tax on these profits is payable.

So…..it is one year to the end of the first year, and then another year until the tax effect. This makes it two years before the tax saving. (OK is is two years less one day, but when we are discounting we are not worried about 1 days interest ) )

how do we treat the tax savings in this case? this is because in the solution the tax is saved as a lump sum in year 2 and i do not understand how that was arrived at as the question specified that the tax is payable one year in arrears

If it is paid at the end of the year, then it will be an outflow at times 1, 2, 3, 4 & 5.
However, if (more likely) it is paid at the start of each year, then it will be an outflow at times 0, 1, 2, 3 & 4.

In the real exam the examiner is usually very clear about this sort of thing (he will say whether it is paid at the beginning or end of the year). If (which is unlikely) he does not, then provided you state your assumption you will get the marks if you have done it correctly on your assumption.