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Sir for option 2, can you explain how the component working for finance costs in answer key different from the below working:
= Increased Finance cost = (.8*28000000*30/365)*9%
Reduced overdraft cause =( 5370000-.2*28000000*30/365) * 7%please sir explain :/ i did the above approach im so confused by numbers and working in answer key for finance costs.
For both options 1 and 2, the average receivables will fall from 5,370,000 to 2,301,370 (as in the answers workings for Option 1) because the collection period will fall to 30 days. So there is a saving of overdraft interest of 214,804 (again, as in the workings for Option 1).
However, with Option 2, the factor will give an advance of 80% of the new receivables (2,301,370) and so the company will received 80% of the amount immediately instead of having to wait 30 days. They will therefore have an extra saving of 7% overdraft interest on this amount, but instead will have to pay 9% of the same amount to the factor – so an extra 2%.
= Increased Finance cost = (.8*28000000*30/365)*9%
Reduced overdraft cost =( 5370000-.2*28000000*30/365) * 7%I’m getting the same answer with this, is this approach fine too?
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