A company enters into an agreement with a firm who will
factor the company’s accounts receivable. The factor agrees to
buy the company’s receivables, which average $100,000 per
month and have an average collection period of 30 days. The
factor will advance up to 80% of the face value of receivables at an
annual rate of 10% and charge a fee of 2% on all receivables purchased.
The controller of the company estimates that the company
would save $18,000 in collection expenses over the year.
Fees and interest are not deducted in advance. Assuming a 360-
day year, what is the annual cost of financing?