- This topic has 11 replies, 3 voices, and was last updated 8 years ago by
.
- Posts
Hello tutor, hope and pray you are doing well….
I am having trouble in finding the value on a non-recourse basis part.
A factor has offered to manage the trade receivables of Bold Co in a servicing and factor-financing agreement. The factor expects to reduce the average trade receivables period of Bold Co from its current level to 35 days; to reduce bad debts from 0·9% of turnover to 0·6% of turnover; and to save Bold Co $40,000 per year in administration costs. The factor would also make an advance to Bold Co of 80% of the revised book value of trade receivables. The interest rate on the advance would be 2% higher than the 7% that Bold Co currently pays on its overdraft. The factor would charge a fee of 0·75% of turnover on a with-recourse basis, or a fee of 1·25% of turnover on a non-recourse basis.
Assume that there are 365 working days in each year and that all sales and supplies are on credit.The way I solved it is as follows:
Non-recourse basis:
Admin fee (factoring fee) 21300*1.25% ($266.25)
admin cost savings 40.00
Bad debts (21300*.9%) 191.7
debtors financing interest(savings, 69.00
Net benefit =103.55But the answer says its a loss? Could you please guide me where it went wrong?
Thanks in advance.
that I calculated earlier)The examiners answer is a bit confusing.
What he says is that non-recourse factoring gives a benefit of 34,797. (He only says there is a loss if we ignore the elimination of bad debts, which was a rather stupid thing of him to say!!!)
The reason that you have got a different net benefit is that something is wrong with you debtors financing interest saving of 69.00.
If you look at the examiners answer, there would be a saving of 102,027 if we were not getting advances from the factor (i.e. if receivables were all financed by the overdraft), but because some of the receivables are financed by the advance from the factor, there is extra interest of 2% on the amount advanced.
Hi..
You said there seems to be something wrong with the interest saving calculation.
Could you please look at the way I solved it.The current interest is = 3500*7% = 245
After factoring,
The revised receivables are:35 = x / 21300 * 365 = 2042.46 Average debtors.
Now out of this 2042.46, the factor has made an advance for 80% of the receivables at the interest cost of 9% ( 2042.46*80%*9% = 147
and for the rest of the 20%, the interest cost is 7% ( 2042.46*20%*7% = 28.59)
Now, current interest – revised interest = 245 – ( 147+28.59) = 69.
So, the saving in interest is $69.Could you please, guide me where I am wrong?
Thanks.
Sorry it was my mistake – the saving of interest of 69 is correct.
You mistake is in your additions in the earlier message – the savings are 40 + 191.7 + 69 = 300.7. Subtract the factoring fee of 266.25 and you get a net benefit of 34.45.
The examiners answer has a net benefit of 34.797 – the difference is simply due to roundings.So if we have to comment on financial acceptability of factoring, we can simply do it on basis of part c, we can simply write that with recourse the net benefit is 13,497 and with non recourse there is a net benefit of 34,797. Either way factoring is acceptable. There is no need to go into the depth the examiner went?
If you were only required to comment on the financial acceptability, then all you need to do is refer to the part (c) calculations.
However in this question, part (d) also required you to discuss the possible benefits of factoring and therefore you do need to write more than simply whether or not it appears to be financially acceptable.
- You must be logged in to reply to this topic.