Company A information is as follows: Average collection period = 60 days. Average level of receivables = $ 2.5 million. Bad debt losses per month = $ 15 000

If the company factors its receivables, it will save $ 4 000 per month be eliminating its credit department. The factor has indicated that it requires 10% reserve for returns and allowances and charges 2.5% factoring commission. The factor will advance funds at 4% points over prime, which is currently 8%.

Please show all the calculations.

1.What is the annual financing cost before considering cost savings and bad debt losses?

2.What is the annual financing costs after considering cost savings and bad debt losses?