[tmura514]

This is a question from Ninja MCQ.
Can anybody tell me why my calculation does not lead to the correct answer?
Something must be very wrong in my calculation, but I can’t figure it out 

Annual loan amount:
$100,000 x 0.8 x 12 months = $960,000
Fees:
$100,000 x 2% x 12 months = $24,000
$960,000 x 10% = $96,000
Total annual cost: $24,000 + $96,000 = $120,000
There is a $18,000 savings.
Net annual cost is $102,000 ($120,000-$18,000)
Annual rate for cost of financing.
$102,000 / $960,000 x 100 =10.625% This is wrong! WHY!?! Anybody?

A company enters into an agreement with a firm which 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?
Incorrect
A.
 
10.0%

B.
 
12.0%

C.
 
16.0%

D.
 
17.5% correct answer

[sonja90]

(100,000*.8*.1)+(1,200,000)*.02=32,000-18,000=14,000/80,000=17.5%

[tmura514]

Sonja90
Thank you for your response.

[Author]

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