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Hi John,
Hope you can help me.
A factor has offered to take over receivables ledger administration and debt collection for Joan Co for an annual fee of 0.5% of credit sales. A condition of the offer is that factor will advance ‘Joan co’ 80% of the face value of its receivables at an interest rate 1% above the current overdraft rate. Joan Co pays interest on its overdraft at an annual rate of 8%. The factor claims that it would reduce outstanding receivables by 30% and reduce administration expenses by 2% per year if it’s offer we’re accepted.
Other info:
Receivables $3,800,000
Revenue $ 15,600,000
Admin exp. $ 1,000,000Required
Evaluate whether the factors offer is financially acceptable.
I would be very grateful if you could explain how to answer this question the way how you did in your lectures. I did understand everything then but now with more complex questions I seem to struggle a bit.
Thank you in advance
Costs p.a.:
Factors fee: 0.5% x 15,600,000 = 78,000
Factors interest: 9% x 80% x (70%x3,800,000) = 191,520Total: 269,520
Benefits p.a.:
Admin 2% x 1,000,000 = 20,000
Interest saving: 8% x (3800000 – (20% x 70% x 3800000) = 261,440Total: 281,440
Net benefit = 281440 – 269520 = 11,920
Hi John
Thank you for your reply.
However I was hoping for bit more ‘wordy’ explanation.Would you be able to explain bit more, just so I could understand the logic behind interest calculation bit better and hopefully remember for future questions?
Regards
Sorry there were not more words, but all the words are in my lecture!!
With the factor the receivables are only 70% of 3.8M.
80% of this is advanced, and the interest is 1% more than the overdraft interest, so 9% is what they charge.For the interest saving, the current receivables are 3.8M. The new receivables are 70% of 3.8M but since 80% is advanced, only 20% of this is left outstanding.
The interest saved is 8% of the difference.
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