Question

Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?

Answer 1

Answer:

14.82%

Explanation:

Data provided in the question:

Receivable contracts = $200,000

Due in days, t = 270

or

= 270 ÷ 365 = 0.74 years

Discount, r = 12% = 0.12

charge for a nonrecourse clause = 1% = 0.01

Now,

Annualized percentage all-in-cost of this factoring alternative

=$[\frac{\text{Receivable contracts}}{(\text{Receivable contracts}\times(1 - rt)-(\text{nonrecourse clause})}-1]^{\frac{4}{3}}$

= $[\frac{\ 200,000}{(\ 200,000\times(1 - 0.12\times0.74)-(\200,000\times0.01)}-1]^{\frac{4}{3}}$

= 0.1482

or

= 0.1482 × 100%

Annualized percentage all-in-cost of this factoring alternative = 14.82%