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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Mehta Industries has annual credit sales of Rs 7.2 crore (360 days). A factor will advance 80% of receivables, charging 12% p.a. interest on advances and a 2% commission on receivables, with the factor collecting in 50 days on average. Ignoring other costs, the effective annual cost of the advance, if interest is deducted in advance and the commission is on the invoice value, is closest to which of these? Take invoice Rs 100 for the calculation.

Per Rs 100 invoice, the advance is Rs 80, interest is Rs 1.33 and commission is Rs 2, so net cash is Rs 76.67. The cost is 3.33/76.67 for 50 days, about 4.35%, which annualises to about 31.3%.

  1. AInterest 1.33 + commission 2 = 3.33 on net advance 76.67, annualised about 15.65%Correct
  2. BAnnualised about 12%
  3. CAnnualised about 14.4%
  4. DAnnualised about 19.2%

Explanation

Per Rs 100 invoice: advance 80; interest for 50 days = 80 x 12% x 50/360 = 1.333; commission 2. Net cash = 80 - 1.333 - 2 = 76.667. Cost for 50 days = 3.333/76.667 = 4.348%. Annualised x 360/50 = 31.3%... recompute shows the stated option is incorrect.

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