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A company has daily sales of $150 000. A debt factor has guaranteed to reduce the company’s receivables collection time by 4 days for a monthly fee of $2500. Cash surpluses can be invested in money market deposits yielding 4% per annum.
What is additional annual income / (loss) from using the cash management service?
Answer : $(6000)May I know how to get the answer?
In future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.
If the collection period is reduced by 4 days, then there will be an interest saving of
4 x $150,000 x 4% = $24,000 per year.The cost of the factor is 12 x $2,500 = $30,000 per year.
Therefore there is a net loss of 30,000 – 24,000 = $6,000.
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