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Dear Sir,
Please advise me on the following ,in one of the BPP, there is the following scenario.
The company offers a credit period of 30 days but because of poor credit control the customers are taking 45 days to pay. the company is evaluating to factor the debts, the factor offered 80% advance payment on the invoices at 14% (3% over the current base rate. the company can obtain an overdraft facility to finance it’s account receivables at a rate of 2.5% over the base period.
sales are 1500000.
0.5% bad debits.There answer, they came out with an annual effective rate for the overdraft of 13.5% (11% + 2.5%).with no further explanation.
I could not figure out how the 13.5% was calculated, so would you please explain it for me.
Regards,
Jouma
The question says that the interest charged by the factor is 14% and that this is 3% over the base rate. So the base rate must be 14 – 3 = 11%.
The overdraft can be obtained at 2.5% over the base rate (I assume that it is you who has mistyped, but if the BPP questions says ‘base period’ then it is a typing error). So the interest on the overdraft is 11 + 2.5 = 13.5%.
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