Question

Radson Inc. decides to factor its accounts receivables which are due a year later with another firm. The firm agrees to advance 85% of the accounts receivables, which average to about $450,000 per year. It would charge a fee of 1.5% on the total amount and the advance would be at the rate of 13.5% per annum. It is estimated that, due to the factoring decision, Radson would save $15,000 in collection charges. Using the facts above, compute the annual cost of factoring to the company.

Answer 1

11.34%

Step-by-step explanation:

Computation for the annual cost of factoring to the company

Annual factoring expenses=43,388/($450,000*85%)

Annual factoring expenses = 43,388/382,500

Annual factoring expenses = 0.1134*100

Annual factoring expenses= 11.34%

Therefore the annual cost of factoring to the company is 11.34%