Your firm has an average collection period of 52 days.Current practice is to factor all receivables immediately at a 2.2 percent discount.What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.

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Quizplus · Accepted Answer

Interest for 51 days = 0.022/(1 - 0.022) = 0.022495; Number of periods per year = 365/52 = 7.019231; EFF = (1.022495)^7.019231 - 1 = 16.90 percent

Your Firm Has an Average Collection Period of 52 Days