Debt Factoring

Msunza Finance Co is prepared to advance 80% of MSU's sales invoicing, provided its specialist collection services are used by MSU. Msunza Finance Co would charge an additional 0.5% of MSU's turnover for this service. MSU would avoid administration costs it currently incurs amounting to $80,000 per annum. The history of MSU's accounts receivable ledgers may be summarised as follows: Turnover ($'000): $ 78,147 (2016) $81,941 (2017) $98,714 (2018) % accounts receivable at year end : 17 (2016) 20(2017) 22 (2018) % accounts receivable of 90+ days (of turnover) 1.5 (2016) 2 (2017) 2.5 (2018) Bad debts ($'000): 340 (2016) 497 (2017) 615 (2018) MSU estimates that the aggressive collection procedures adopted by the finance company are likely to result in lost turnover of some 10% of otherwise expected levels. Currently, each $1 of turnover generates 18 cents additional profit before taxation. MSU turns its capital over, on average, three times each year. On receipt by Msunza Finance Co of amounts due from MSU's customers, a further 15% of the amounts are to be remitted to MSU. The cheapest alternative form of finance would cost 20% per annum. Required: (a) Calculate whether the factoring of MSU's accounts receivable ledger would be worthwhile.