A firm sells its accounts receivable to a factor at a 2% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

Question

Quizplus · Accepted Answer

To find the effective annual rate, we need to use the formula:

Effective annual interest rate = (1 - Discount rate) ^ (12 / Average collection period) - 1

Substituting the given values, we get:

Effective annual interest rate = (1 - 0.02) ^ (12/1) - 1
Effective annual interest rate = 0.2743 or 27.43%

Therefore, the best choice is A.

A Firm Sells Its Accounts Receivable to a Factor at a 2