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Cottage Construction is considering factoring its accounts receivable. Credit sales amount to R26million per year. The company's collection period is...
Cottage Construction is considering factoring its accounts receivable. Credit sales amount to R26million per year. The company's collection period is 60 days. Finbond Limited is a factoring company. They are prepared to offer Cottage Construction the following terms:
50% on each credit invoice will be paid immediately and interest will be charged at 2% above the current prime rate of 9%.
Service Fees will be charged at 2%of total sales.
The Company is offered a discount of 4% for cash settlement by its suppliers, subject to a discount amount of 40% of its total sales.
Cottage Construction will save R140,000 in expenses, if it were to factor.
Note: Assume 365 Days equals a year.
Required:
5.2.1 Calculate the effective cost of factoring
5.2.2 Is this form of Factoring effective? Justify your answer.
