Question

A Korean coffee cup manufacturer sell $3,000,000 in accounts receivable to a factor. The receivables are due in 60 days. The factor charges a 1.5% per month factoring fee for purchasing the accounts receivable and the fee is paid at the time the receivables are sold to the factor. What is the all-in (effective annual) cost of financing the A/R through factoring? A. 17.46% B. 20.05% C. 2.10% D. 28.08%

Answer 1

		Cash received at the beginning by cup manufacturer						=	3000000
		Factoring fees paid						=	3%X3000000
								=	90000
		After two months cash outflow by cup manufacturer						=	3000000
		Cash Flows
		Month0	Month1	Month2
Cash received		3000000
Factoring fees		-90000
Cash paid on maturity				-3000000
Net Cash Flow		2910000	0	-3000000
IRR	=	1.535%	(2910000 + (-3000000/1.01535%^2)) = 0
Annualized cost		=	(1+1.535%)^12-1
		=	20.05% B option correct