1. Company KPC has an average trade receivables of $5,500,000 and annual sales of $11.5 million. It is considering the use of factoring given that this would result in a reduction in credit control costs of $425,000 per annum. The factoring house charges a fee of 1.2% of sales. It will provide an advance to the company of 80% of its receivables and will charge interest on this advance of 9 % per annum.

Required: Assess whether it is financially beneficial for company KPC to enter into this factoring arrangement.