Question

XYZ has accounts receivable with an average collection period of 25 days. A factor is willing to finance the accounts receivable at 99% of face value. What is the effective annual rate on this financing?

A. 14.0%

B. 15.8%

C. 21.2%

D. none of the above

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		Face Value (F)	$1,000	(Assumed)
4		Price (P)	$990	=D3*99%
5
6		Period(n)	25	days	(Since accounts receivable will be repaid in 25 days)
7			0.068493	Year
8
9		Let r be the effective rate then
10
11		Price	=F/ (1+r)n
12		or
13		$999	=$1000 / (1+r)0.0685
14
15		Solving the above equation,
16
17		r	15.80%	=((D3/D4)^(1/D7))-1
18
19		Hence effective interest rate is	15.80%
20		Thus the option (B) is correct.
21