Page 482 - FM Integrated WorkBook STUDENT 2018-19
P. 482
Chapter 21
Second factor:
On 85% of sales the factor will make immediate payment, removing the 6%
overdraft cost for the receivables in relation to those sales. Instead, however,
the factor will charge a 7% cost. So that will represent an increase of 1% in
terms of the financing cost for these receivables.
$7,808,219 × 85% = $6,636,986.
Extra cost at 1% = $66,370.
Factor fee = $50m × 0.25% = $125,000
Total cost = $191,370
Admin saving: $100,000.
This is not acceptable to ABC Co as they will be $91,370 worse off.
Question 5
Early payment discount
A supplier has offered a discount to Paxton Co of 1.5% for early payment within
5 days of invoices for which 35 days is the usual payment time.
If Paxton Co funds working capital at a rate of 15% per annum, should the
discount be accepted?
Effective annual benefit = [1 + 1.5/98.5] (365/30) – 1 = 0.2019 or 20.2%
If the company accepts the discount, it will save money from lower payments at
a rate of 20% per annum but it will need to increase its working capital
investment at a cost of 15%. As the saving is larger than the extra funding cost
from investing more in working capital, the discount should be accepted.
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