Question

Custom Granite Inc. has a Canadian receivables contract for $500,000 due in 180 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 9% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative? (365 day per year).

Please show work. Thank you!

Answer 1

Amount of receivables =	500000
Amount due in	180 days
Discount rate =	9%
Amount of discount =Receivable amount * discount rate * time
500000 * 9% * 180/365
$22,191.78
Non-recourse fees =	1.00%
Non- recourse fees =Amount of receivables * fees
500000 * 1%
5000
Total cost of factoring = 22191.78 + 5000
$27,191.78
Amount received = 500000 - 27919.78
$472,080.22
Annualized cost formula = Total cost of factoring/ Amount received * 365/no. of days
27919.78/472080.22 * 365/180 * 100
11.99%
So, annualized cost of factoring is 11.99%