Relative costs and benefits, Financial Management

Q. Relative costs and benefits?

Option 1- Factoring

Reduction in receivables days = 15 days

Reduction in receivables =15/365* £20m

= £821916

2101_Relative costs and benefits.png

Option 2 - The discount

With year-end receivables at £4.5m the receivables collection period was

£4.5m/£20m × 365 = 82 days

The scheme of discounts would change this as follows

10 days for 20% of customers

20 days for 30% of customers

82 days for 50% of customers

Average receivables days becomes

(20% * 10) + (30% * 20) + (50% * 82) = 49 days

The cost of the discount would be:

(3% * 20% * $20m) + (1.5% * 30% * £20m) = (£210000)

Consequently average receivables would reduce from the present $4.5rri to 49 × (£20m-£0.21m)/365 = £2656740

The interest saving would be 13% × £4.5m - £2.657m) = £239590

The net advantage to profit before tax would be

(£239590 - £210000) = £29590

The figures involve that submission settlement discounts is somewhat the more attractive but this result relies on the predicted proportions of customers in fact taking up the discount and paying on time. It as well abandons the possibility that some customers will insist on taking the discount without bringing forward their payments. Marton would have to consider a suitable response to this problem.

In contrast the assessment of the value of using the factor depends on the factor lowering Marton's receivables days. If the factor remains these benefits for itself rather than passing them on to Marton, this will elevate the cost of the factoring option. Additionally it isn't clear what benefit the insurance premium gives Marton.

Posted Date: 7/12/2013 2:53:39 AM | Location : United States

Related Discussions:- Relative costs and benefits, Assignment Help, Ask Question on Relative costs and benefits, Get Answer, Expert's Help, Relative costs and benefits Discussions

Write discussion on Relative costs and benefits
Your posts are moderated
Related Questions
Simple Arbitrage The easiest arbitrage opportunities in the option market exist when options violate simple pricing bounds. No option, for example, should sell for less than it

Scenario:  ABC Company sells widgets in three varieties (blue, red, and yellow) but has lost money for the past three years.  Competitive intelligence shows the Company's products

Factors of Importance of returns in any investment Importance of returns in any investment decision can be traced to the following factors: It enables investors to

Sovereign debt is a debt instrument guaranteed by the government. The other names for sovereign debts are sovereign bonds or government bonds. They are issued in

Q. Define Policy formulation - accounts receivable management This is concerned with set up the framework within which management of accounts receivable in an individual compan

Investment Objectives: Any investment should always start with identifying its objective. Thus, the first step in the pension fund investment management system is defining the

Bonds pay interest periodically at a pre-specified rate of interest. The annual rate at which this interest is paid is known as the coupon rate or simply the coup

Accounts receivable are sometimes not collected.  Why do companies extend trade credit when they could insist on cash for all sales? Extending trade credit almost all the time le

2. Suppose a 12% coupon bond sells at par today; and three years from today, the required rate on the same bond is 8%. What is the coupon rate on the bond today and what will it be