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How much can the firm obtain from factoring its receivables

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Question - Say a firm needs short-term financing. The firm's bank has offered a reasonable sum of loan for a term of one year at the interest rate of 9.5% per annum. The firm is considering if it should factor its receivables instead. The firm's sales in the coming year is expected to be RM29.2 million, and its average collection period is estimated to be 73 days. A factor offers a discount rate of 2.5% for the firm's receivables.

(a) How much can the firm obtain from factoring its receivables, and for how long?

(b) What is the cost per year to the firm if it factors its receivables continually?

(c) Should the firm take the bank loan or factor its receivables? Explain.

Reference no: EM133014964

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