Question

A company has a collection period of 29 days and factors all receivables immediately at a discount of 1.9 percent. What is the effective annual cost of borrowing

Answer 1

Answer: 27.3%

Step-by-step explanation:

Effective annual cost =( ( 1 + Interest) ^ Period ) - 1

Period = 365/Collection period

= 365/29

= 12.586 days

Interest = Discount rate / ( 1 - Discount rate)

= 1.9% / ( 1 - 1.9%)

= 1.9368%

Effective Annual cost = ( ( 1 + 1.9368) ^ 12.586 ) - 1

= 27.3%