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Maximum Bank and Scientific Software, Inc.: Alternative financing

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Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank's ters include a lending rate set at prime plus 3% and a 2% commission charge. The prime rate currently is 8.5%.
a. The bank will adjust the accounts by 10% for returns and allowances. It will then lend up 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?
b. What is Scientific Software's effective annual rate of interest if it borrows $100.000 for 12 months? For 3 months? (Assume a 365-day year and prime rate that remains at 8.55 during the life of the loan.)

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Solution Summary

The cost of borrowing using accounts receivable as collateral is calculated.

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Question A: The bank will adjust the accounts by 10% for returns and allowances. It will then lend up 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?
Maximum amount = adjusted collateral*85% = ...

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