Find annual financing cost before considering cost savings

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Reference no: EM13927130

Designer Textiles, Inc., is considering factoring its receivables. The company's aver- age collection period is 60 days, and its average level of receivables is $2.5 million. Designer's bad-debt losses average $15,000 a month. If the company factors its receivables, it will save $4,000 a month by eliminating its credit department. The fac- tor has indicated that it requires a 10 percent reserve for returns and allowances and charges a 2.5 percent factoring commission. The factor will advance Designer funds at 4 percentage points over prime, which is currently 8 percent.

a. Determine the annual financing cost, before considering cost savings and bad-debt losses.

b. Determine the annual financing cost, after considering cost savings and bad-debt losses.

Reference no: EM13927130

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