Elegance wants to raise money in the short term. The company has the following options available:

Option A: Factoring Arrangement

Factor its accounts receivables immediately at a 3% discount. The average collection period is 41.95 days.

Option B: Bank Overdraft

Obtain an overdraft facility at prime plus 1%. The prime rate is 26.5%.

REQUIRED:

3.5	Calculate the effective annual interest rate on the factoring arrangement.	3 marks
3.6	Advise Elegance on whether to select the factoring arrangement or bank overdraft. Provide a reason for your answer.	2 marks