Mac Department Stores sell goods on terms of net 40.The store's average monthly sales (all on credit)are $70,000.Mac pledges all of its receivables to the bank,which advances 80% of the face value of the receivables at a rate of 2.5% above prime.The bank also charges a 1% processing fee on all receivables pledged.Mac borrows the full amount possible,and the current prime rate is 5%.What is the annual percentage rate (APR)of using this source of financing for one full year?
A) 23.5%
B) 22.5%
C) 21.8%
D) 19.1%

Question

Quizplus · Accepted Answer

First, we need to calculate the average accounts receivable of Mac Department Stores:

$70,000 average monthly sales / 30 days = $2,333.33 average daily sales
$2,333.33 average daily sales x 40 days = $93,333.33 average accounts receivable

Next, we can calculate the amount of the advance from the bank:

$93,333.33 average accounts receivable x 80% = $74,666.67 advance from the bank

The processing fee charged by the bank is:

$93,333.33 average accounts receivable x 1% processing fee = $933.33 processing fee

So the net amount received by Mac Department Stores is:

$74,666.67 advance - $933.33 processing fee = $73,733.34 net amount received

The interest charged by the bank is:

5% prime rate + 2.5% above prime = 7.5% interest rate
$73,733.34 net amount received x 7.5% interest rate = $5,530.00 interest charged

The APR can be calculated using the following formula:

APR = (interest charged / net amount received) x (365 / number of days borrowed)

Since the terms are net 40, the number of days borrowed is 40. Plugging in the numbers:

APR = ($5,530.00 / $73,733.34) x (365 / 40) = 0.225 or 22.5%

Mac Department Stores Sell Goods on Terms of Net 40