Al-Rafay Company needs to increase its working capital by Rs400,000. The following three alternatives are available are available (assume 360-days in a year).

a) A factor will buy the companys receivables which have an average collection period of 30 days and factor will advance up to 75% of face value of the receivable at 18% on an annual basis. Companys sale is amounted to Rs6,000,000 p.a of which 90% on credit basis.

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The factor will also charge a 4 % fee on all receivable purchased. It has been estimated that the factors services will save the company Rs12,000 per month.(consisting of both credit department expenses and bad debt expenses)

b) Revolving credit (Line of Credit) arrangement was made with the bank of Rs800,000 from which 50 percent was actually utilized at the rate of 12 p.a and commitment fee was at the rate of 5 percent.

c) A terminal warehouse loan is obtained from the finance company for 6 months. Terms are 12 percent annualized with an 85% advance against the value of the inventory. Value of inventory was Rs400,000. The warehouse costs are Rs10,000 for the six month period. The residual financing requirements will be financed by forgoing some cash discount on its payables. Standard terms are 2/10 n/30, however, the company feels that it can postpone payments until the 40th day without any adverse effect.

Required: Which alternative should Danish Company select? Why?