Custom Granite Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?

Question

Quizplus · Accepted Answer

To calculate the all-in-cost of factoring, we need to consider both the discount rate and the nonrecourse fee.

Discount rate = $200,000 x 12% x (270/360) = $16,200
Nonrecourse fee = $200,000 x 1% = $2,000

Total cost of factoring = $16,200 + $2,000 = $18,200

Annualized percentage cost of factoring = $18,200 / $200,000 x (360/270) x 100% = 14.82%

Therefore, the best choice is A with an all-in-cost of 14.82%.