Assume that the operation of your business resulted in sales of $730,000 last ye

Question

Assume that the operation of your business resulted in sales of $730,000 last year. Year-end receivables are $100,000. You are considering factoring the receivables to raise cash to help finance your venture’s growth. The factor imposes a 7 percent discount and charges an additional 1 percent for each expected ten-day average collection period over thirty days. A.Estimate the dollar amount you would receive from the factor for your receivables if the collection period was thirty days or less.

B.Estimate the dollar amount you would receive from the factor for your receivables if the average collection period was sixty days.

C.Show how your answer in Part B would change if the factor charges an 8 percent discount and charges an additional 0.5 percent for each expected fifteen-day average collection period over thirty days. D.If the $730,000 in sales last year were evenly distributed throughout the year, an average $100,000 in receivables outstanding would imply what average collection period? Given the original terms stated in the problem, what dollar amount would you expect to receive for your receivables?

Explanation / Answer

A.

If the collection period is 30 days or less,

Dollar amount received = $100,000 – ($100,000*0.07) = $93,000

B.

If the collection period is 60 days, the factor will charge 10% of the value (i.e., .07 for 30 days plus an additional .01 for 31-40 days, plus an additional .01 for 41-50 days, and an additional.01 for 51-60 days.

Thus, the dollar amount received would be: $100,000 – ($100,000*0.10) = $90,000.

C.

Percentage to be charged by the factor = 8% + 0.5% + 0.5% = 9%

Dollar amount received = $100,000 - ($100,000*0.09)= $91,000

D.

Average collection period = $100,000 / ($730,000 / 365) = $100,000/$2,000 = 50 days

Original terms for 50 days, the factoring charge would be 7% + 1% +1% = 9%

Dollar amount received = $100,000 - ($100,000*0.09) = $91,000

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