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Receivable Management


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#1 caebby

caebby

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Posted 20 May 2014 - 05:45 PM

A company enters into an agreement with a fi rm
who will factor the company’s accounts receivable. The factor
agrees to buy the company’s receivables, which average
$100,000 per month and have an average collection period of
30 days. The factor will advance up to 80% of the face value of receivables at an annual rate of 10% and charge a fee of 2%
on all receivables purchased. The controller of the company
estimates that the company would save $18,000 in collection
expenses over the year. Fees and interest are not deducted in
advance. Assuming a 360-day year, what is the annual cost of
financing?

 

 

I agree with the annual net cost according to the solution: 24000.
I don't understand why dividing 24000/80000? Why dividing annual cost per a monthly amount (80000)?