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Aunt Tilly's Feeds, Inc.

Aunt Tilly's Feeds, Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment is made on an average of 30 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers factoring on a non-recourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000 per year.

(a) What is the effective interest rate and the average amount of funds available under pledging and under factoring?

(b) Which plan do you recommend? Why?

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Solution Summary

Compute for effective interest rate and average available funds for Aunt Tilly's Feeds, Inc. if it will obtain funds by accounts receivable pleding and nonrecourse factoring