calculate the effective cost of factoring. Would you recommend factoring af accounts receivable as a viable option? Explain your answer

QUESTION 1 25 marks) The following information applies to Mugufuli Trousers Ltd Mugufuli Trousers Ltd is a Black Economic Empowerment (BEE) company dealing in women's clothing The company is considenng factoring its accounts receivable due to poor collection efforts by its credit department At present, the company's annual sales amount to R27 million, all on credit The factonng house has offered the following terms The house will charge a service facity of 1% of gross turnover and a finance tackty charge of 9% per annum on accounts receivable advanced At present, the average collection penod for Mugufuli Trousers Ltd is 30 days The house will also hold retention of 20% of the outstanding accounts receivable it is estmated that cost savings of R218 562 will occur for the company as a result of the factoring house administering its accounts receivable Mugufuli Trousers Ltd can obtain overdraft facilities at an opportunity cost of 11% per annum (Assume 365 days per year)