- This topic has 3 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
Dear fellow students & tutors,
My friend & I have an alternative theory in relation to this question. We understand that the answer is not similar to the answer provided in the practice kit. However, we would like to put our theory to the test. Kindly give us a feedback.
With-recourse offer
Revised trade receivables under factoring = $2,042,466
Reduction in trade receivables = $3,500,000 – $2,042,466 = $1,457,534Admin cost savings = $40,000
Bad debt savings $21,300,000 x (9 – 6)% = $ 63,900
Finance cost savings:
– Reduction in trade receivables $1,457,534 x 7% = $102,027
– Reduction in overdraft to nil, restricted to $210,000 – 102,027 (W1) = $107,973Less:
Factor fee $21,300,000 x 0.75% = – $159,750
Interest on factor advance $2,042,466 x 80% x 9% = – $147,058Value of with-recourse offer = $7,092
(W1)
Overdraft balance upon reduction in trade receivables $3,000,000 – $1,457,534 = $1,542,466
Further reduction in overdraft due to factor advance $2,042,466 x 80% = $1,633,973The overdraft balance should turn into a positive bank balance after the factoring advance.
This means that the total amount of finance cost (i.e. $210,000) would be saved.The BPP answer is correct (and is simply a reprint of the examiners own answer to the question).
There is a flaw in your solution.
The question is requiring calculation of the net benefit of using the factor.
If the factor was not offering the advance of 80%, then they would be paying overdraft interest on that amount of 2,042,466 x 80% x 7%.
Because the factor is giving the advance, they will not be paying that overdraft interest but instead will be paying interest to the factor of 2,042,466 x 80% x 9%So there is a cost of using the factor of the extra 2%.
- The topic ‘Bold Co, Part C (BPP practice kit) – Alternative Theory’ is closed to new replies.