Financially beneficial for the company

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CD has annual sales revenue of $2,007,500 and trade receivables of $330,000 which represent 60 days' sales based on a 365 day year. Sales and trade receivables are expected to continue at the same level for the next year. CD pays interest on its overdraft at a rate of 10% per annum.

CD is considering the use of non-recourse factoring to manage its trade receivables. The factor will pay 80% of the trade receivable when a credit sale is made and the remaining 20% when the cash is received from the customer. It is estimated that, as a result of the factor's expertise, cash will be received from customers in 50 days. The factor will charge interest at a rate of 12% per annum on cash advanced and a fee of 2% of annual sales revenue. CD estimates that credit control costs will be reduced by $30,000 each year if the factor is used. Calculate whether it is financially beneficial for the company to use the factor.

Reference no: EM132203742

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