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Compute net annual financing cost of factoring ararrangemet

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DuBois Apparel Company is considering factoring its receivables. The company's average level of receivables is $1.5 million, and its average collection period is 45 days. DuBois's bad-debt losses average $8,000 per month, which it would not incur if it factored its receivables. (Assume 30 days per month.) Also, the company would save $4,000 per month in credit department costs if it factored its receivables. The factor requires a 10 percent reserve for returns and allowances and charges a 2 percent factoring commission. DuBois can borrow funds from the factor at 3 percentage points over the prime rate (currently 9 percent). Determine the net annual financing cost of this factoring arrangement.

Reference no: EM13927090

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