Question

U.S. Fertilizers has received an order for USD 1,000,000 from a customer in Argentina. The exporter is considering an export insurance for a 2% premium, which is a flat fee.

The exporter will finance the USD 1,000,000 receivable from the Argentine customer at 6% per annum for 3 months. U.S. Fertilizers will use its credit line for financing. What is the exporter's annualized percentage all-in-cost? [AIl-in-cost = Total costs/Amount received]

		14.51%
		6.01%
		12.02%
		7.25%
		3.63%

Answer 1

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Answer:

A flat fees of 2% is charged as insurane, thus the insurace charge would be 1,000,000 * 2% = $20,000 (A)

Finance charge for the receivable 6% per annum for 3 months.

Charge = Receivable amount* interest rate* period

= $1,000,000 * 6% * 3/12 = $15,000 (B)

Total charger (A+B) = $35,000

All in cost based on the formula given in the question itself =

Amount received = ($1,000,000 - Flat fee (A) - Finance charge (B)) = $965,000

All in cost = 35,000 / 965,000 = 3.63%