Use the model in File C16 to work this problem. Refer back to Problem 16-13.
a. Would it be to Cooley’s advantage to offer to pay the factor a commission of 2.5 percent if it would lower the interest rate to 10.5 percent annually?
b. Assume a commission of 2 percent and an interest rate of 12 percent. What would be the total cost of the factoring arrangement if Cooley’s funding needs rose to $650,000? Would the factoring arrangement be profitable under these circumstances?

In problem 16-13:

Cooley Industries needs an additional $500,000, which it plans to obtain through a factoring arrangement. The factor would purchase Cooley’s accounts receivable and advance the invoice amount, minus a 2 percent commission, on the invoices purchased each month. Cooley sells on terms of net 30 days. In addition, the factor charges a 12 percent annual interest rate on the total invoice amount, to be deducted in advance.