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in part c its given in the question factor would advance 80% of the face value of recievables at an annual interest rate of 7%
they have calculated axtra interest cost on advance 3073973*80%8 (7%-5%)…. why have we taken the difference of 7 and 5 to calculate extra interest what i was doing was 3074*80%*7%=172.14
3074*20%*5%=30.74what will be the effect of factoring on a non recourse basis??
There is more than one way of getting to the same answer – it does not matter which approach you take.
What the examiners answer has is a reduction in finance cost of $76,200 p.a. and extra interest payable on advances of $49,184. So a net saving there of 76,200 – 49,184 = 27,016.
On your approach, the cost of financing receivables currently is 4,600,000 x 5% = 230,000
The new cost of financing receivables is (as per your workings above) 202,880.A net saving of 230,000 – 202,880 = 27,120.
(The difference is purely due to roundings and is irrelevant)
So the final answer would be the same. Stick to the method you are happy with and you will get the marks.
With regard to non-recourse factoring (as is the case in this question) it simply means that the company is guaranteed not to suffer any bad debts. Currently there are bad debts of 350,000 per year, and since in future there will be none this is an extra saving from factoring.
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