In order to convert Account Receivable into faster cash, a company can sell its accounts receivable...

90.2K

Verified Solution

Question

Finance

In order to convert Account Receivable into faster cash, acompany can sell its accounts receivable to another company, calleda factor, at a discount. Assume your average credit sales are $50million per year and average accounts receivable are $5 million. Afactoring company offers you an agreement that it will be buyingyour accounts receivable at a 2.20% discount. Your bank offers youa credit at R% per year (actual yearly rate). What would be theminimum R% for which you would choose factoring? That is, what isthe rate R% offered by the bank at or below which you would ratherborrow money from the bank instead of factoring? Express youranswer as a percentage.

Answer & Explanation Solved by verified expert

3.9 Ratings (789 Votes)

Formula to calculate accounts receivable collection period Collection period Average accounts receivableAverage credit sales365 Assuming 365 days See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

In order to convert Account Receivable into faster cash, acompany can sell its accounts receivable to another company, calleda factor, at a discount. Assume your average credit sales are $50million per year and average accounts receivable are $5 million. Afactoring company offers you an agreement that it will be buyingyour accounts receivable at a 2.20% discount. Your bank offers youa credit at R% per year (actual yearly rate). What would be theminimum R% for which you would choose factoring? That is, what isthe rate R% offered by the bank at or below which you would ratherborrow money from the bank instead of factoring? Express youranswer as a percentage.