QUESTION 3: (10 MARKS)

Faller Company has average trade receivables of $1,050,000 and annual sales of $4.2 million. It is considering the use of factoring given that this would result in a reduction in credit control costs of $150,000 per annum. The factoring house charges a fee of 1.6% of sales. It will provide an advance to the company of 82% of its receivables and will charge interest on this advance of 10% per annum.

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