Question

Question 13 View Policies Current Attempt in Progress Pharoah, Inc., sells $286,000 of its accounts receivable to factors at a 3 percent discount. The firm's average collection period is 90 days. What is the dollar cost of the factoring service? (Round answers to nearest whole dollar, eg. 5,275.) per month Dollar cost of factoring $ Dollar cost over 90 days $ e Textbook and Media What is the simple annual interest cost of the loan? (Do not round itermediate calculations. Round answer to 1 decimal place, eg. 15.1%) Simple annual interest cost eTextbook and Media What is the effective annual interest cost of the loan? (Round answer to 2 de 2 decimal places, eg. 15.25%) Effective annual interest cost e Textbook and Media MacBook Air

Answer 1

Dollar cost of factoring = 3% of $286000

= $8,580 for 90 days or 3 months

Dollar cost per month = $85800/3 = $2860 per month

This factoring is equivalent to taking a loan of ($286000 -$8580 ) = $277420 and paying an interest of $8580 after 3months

So,effective interest rate for 3 months = 8580/277420 = 0.03092 = 3.09%

So, simple annual interest cost = 3.092% * 4 = 12.37% p.a.

& Effective annual rate of interest = (1+0.03092)^4 - 1 = 12.96% p.a.