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Dear Sir,
In the question when I have to compare:
-existing receivable collection costs in company
– costs resulting from using the factor
There is one-off cost to the factor: 25,000$
In the solution this costs is not considered as factoring cost – instead 25,000 x 12% (cost of debt) is taken.
It’s explained that’s because its on-off not annual cost.
Could you please explain why only interest – cost that could have been aerned is taken into the calculation?Best Regards,
It is because it is a cost that is only payable once – not every year.
All the other costs and savings occur every year, and we are calculating the net cost or saving per year in order to decide whether or not it would be worthwhile. So we cannot include this cost because it is only ever paid once.
So….if we assume we have to borrow the money then the cost that will occur each year is the interest on the money borrowed.<cite> @anas22 said:</cite>
Every time we assume that we have to borrow money to pay the factor??Any money used by the company is being borrowed – even if the company has money in the bank it is effectively being borrowed from shareholders because they are otherwise entitled to it as dividend.
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