1.2 CSI Construction is considering factoring its accounts receivable. Credit sales amount to approximately R26 million per year. The companys collection period is 60 days.

FSI Limited is a factoring company. They are prepared to offer CSI Construction the following terms: 50% on each credit invoice will be paid immediately and interest will be charged at 2% above the current prime rate of 9%. Service fees will be charged at 2% of total sales. The company is offered a discount of 4% for cash settlement by its suppliers, subject to a discount amount of 40% of its total sales. CSI Construction will save R140 000 in expenses, if it were to factor.

Required:

1.2.1 Calculate the effective cost of factoring. (10)

1.2.2 Is this form of factoring effective? Justify your answer. (3)

1.3 Your goal is to travel exactly 10 years from now. You believe that you will need R40 000 at that point. How much must you invest now to have at an interest rate of 7% compounded semi-annually?