Question

Once Upon a Credit offers retail store credit card programs to its customers. It has an ongoing practice of factoring its receivables to maximize cash on hand so that it can keep expanding its credit program to its customers. Assuming that their factoring is all done on a without recourse basis, which option provides the most cash immediately on a $300,000 receivable.

i. Finance Charge 2% and Holdback of 4%
ii. Finance Charge 4% and Holdback of 5%
iii. Finance Charge 5% and Holdback of 2%
iv. Finance Charge 5% and Holdback of 5%

Answer 1

To determine which option provides the most cash immediately, calculate the amount of cash received after factoring for each option by subtracting the finance charge and holdback from the receivable amount. Option i provides the most cash immediately on a $300,000 receivable, with $282,000.

Step-by-step explanation:

To determine which option provides the most cash immediately on a $300,000 receivable, we need to calculate the amount of cash received after factoring for each option.

Option i: Finance Charge 2% and Holdback of 4%

Option ii: Finance Charge 4% and Holdback of 5%

Option iii: Finance Charge 5% and Holdback of 2%

Option iv: Finance Charge 5% and Holdback of 5%

To calculate the amount of cash received, we can subtract the finance charge and holdback from the receivable amount. After calculating for each option, we can compare the results to determine which option provides the most cash immediately.

Option i: ($300,000 - (2% of $300,000) - (4% of $300,000)) = $282,000

Option ii: ($300,000 - (4% of $300,000) - (5% of $300,000)) = $271,500

Option iii: ($300,000 - (5% of $300,000) - (2% of $300,000)) = $278,400

Option iv: ($300,000 - (5% of $300,000) - (5% of $300,000)) = $267,000

Based on the calculations, Option i provides the most cash immediately on a $300,000 receivable, with $282,000.