Answered>Order 3940

Cottage Construction is considering factoring its accounts receivable. Credit sales amount to R26million per year. The company’s collection period is 60 days. Finbond Limited is a factoring company. They are prepared to offer Cottage Construction the following terms:

50% on each credit invoice will be paid immediately and interest will be charged at 2% above the current prime rate of 9%.

Service Fees will be charged at 2%of total sales.

The Company is offered a discount of 4% for cash settlement by its suppliers, subject to a discount amount of 40% of its total sales.

Cottage Construction will save R140,000 in expenses, if it were to factor.

Note: Assume 365 Days equals a year.

Required:

5.2.1 Calculate the effective cost of factoring

5.2.2 Is this form of Factoring effective? Justify your answer.