Relative costs and benefits, Financial Management

Assignment Help:

Q. Relative costs and benefits?

Option 1- Factoring

Reduction in receivables days = 15 days

Reduction in receivables =15/365* £20m

= £821916

2101_Relative costs and benefits.png

Option 2 - The discount

With year-end receivables at £4.5m the receivables collection period was

£4.5m/£20m × 365 = 82 days

The scheme of discounts would change this as follows

10 days for 20% of customers

20 days for 30% of customers

82 days for 50% of customers

Average receivables days becomes

(20% * 10) + (30% * 20) + (50% * 82) = 49 days

The cost of the discount would be:

(3% * 20% * $20m) + (1.5% * 30% * £20m) = (£210000)

Consequently average receivables would reduce from the present $4.5rri to 49 × (£20m-£0.21m)/365 = £2656740

The interest saving would be 13% × £4.5m - £2.657m) = £239590

The net advantage to profit before tax would be

(£239590 - £210000) = £29590

The figures involve that submission settlement discounts is somewhat the more attractive but this result relies on the predicted proportions of customers in fact taking up the discount and paying on time. It as well abandons the possibility that some customers will insist on taking the discount without bringing forward their payments. Marton would have to consider a suitable response to this problem.

In contrast the assessment of the value of using the factor depends on the factor lowering Marton's receivables days. If the factor remains these benefits for itself rather than passing them on to Marton, this will elevate the cost of the factoring option. Additionally it isn't clear what benefit the insurance premium gives Marton.


Related Discussions:- Relative costs and benefits

Optimal portfolio selection, Optimal Portfolio Selection: The next step...

Optimal Portfolio Selection: The next step involves selecting the optimal portfolio. The strategic asset allocation will have overriding importance in pension fund management.

Discuss the pros and cons of financing in unhedged, You have the following ...

You have the following information about rates in London for Eurocurrency loans of one-year duration, the exchange rate between the USD and euros, the currency in which you want fi

Standard communication protocol used for the internet, Question: (a) W...

Question: (a) What is a computer virus? List and explain the different type of computer viruses? (b) List 4 steps which you can use to minimize the chances of being infec

Callable bonds and puttable bonds, Convertible bonds can be classified into...

Convertible bonds can be classified into different types such as callable bonds and puttable bonds. These bonds are discussed as follows: Basics of Callable Bonds A callabl

Caselet, suggestion regarding credit limit. should it be approved or not wh...

suggestion regarding credit limit. should it be approved or not what should be the amount of credit limit that electronics give to booth plastics

Reasons for growth of hedge funds, Reasons for Growth of Hedge Funds Ma...

Reasons for Growth of Hedge Funds Many Hedge Fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets. Inclusion of Hedg

Asymmetric cash matching, When a set of predetermined liabilities are given...

When a set of predetermined liabilities are given, the investor must construct a non-callable bond portfolio of homogeneous ratings by considering certain characteris

Inflation in international markets, Inflation in International Markets ...

Inflation in International Markets In 1983, Gultekin tried to find out the relation between stock return and the inflation rates (expected/unexpected). He accomplished this by

Yield spread measures for floating-rate securities, In a floating rat...

In a floating rate security, the coupon rate changes periodically as per the reference rate. The yield to maturity of floating rate securities cannot be calculated as

Role of interest groups in public policy making, Question 1: Explain cl...

Question 1: Explain clearly why "Public Policy Making constitutes a major part of the work of the Government. Question 2: Consider the role of interest groups in public

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd