FACTORING (BOLD CO)

You can either show the full cost of 9% and the full saving on the lower receivables at 7%, or alternatively for the amount from the factor you can just show the extra 2%. The final net cost or saving will be exactly the same either way.

Im sorry but i dont quite understand. How can the answer be same ? I have already shown the savings at 7% and they are 1457535 (fall in receivables)* 7%. Now, if I show the cost at 9%, the cost will increase and the answer will be different from the examiner.

There is no need to apologise. The alternative way of getting the same answer is as follows: The factors interest charge is 9% x 0.8 x 2042466 = $147,048 Given that the factor effectively becomes the debtor and so they receive 80% immediately and 20% after 35 days, the average collection period becomes (80% x 0) + (20% x 35) = 7 days. So the new average receivables = 7/365 x $21,300,000 = $408,493, and the interest saving is: ($3,500,000 - 408,493) x 7% = $216,405 Everything else in the answer remains the same and the overall net benefit will be the same. (The finance cost saving less the interest on advances is either 102,027 - 32,679 = 69,348 as in the printed answer, or using the alternative above is 216,405 - 147,048 = 69,347. (The $1 rounding difference is irrelevant!!)) Either approach is fine - I find my approach above more logical.

Ok. I understand now. Thank you very much !

You are very welcome :-)