1. Manufacturing A needs an additional P200,000. The financial manager is considering two

methods of obtaining this money: a loan from a commercial bank or a factoring

arrangement. The bank charges 12% per annum interest, discount basis. It also requires a

15% compensating balance. The factor is willing to purchase Manufacturing A's accounts

receivable and to advance the invoice amount less a 3% factoring commission on the

invoices purchased each month. (All sales are on 30-day terms.). A 10% annual interest rate

will be charged on the total invoice price and deducted in advance. Also, under the

factoring agreement, Manufacturing A can eliminate its credit department and reduce credit

expenses by P2,000 per month. Bad debt losses of 10% on the factored amount can also be

avoided.

A. How much should the bank loan be in order to net P200,000? How much accounts

receivable should be factored to net P200,000?

B. What are the computed interest rates and the annual total peso costs, including

credit department expenses and bad debt losses, associated with each financing

arrangement?

C. Discuss some considerations other than cost that may influence management's

choice between factoring and a commercial bank loan.

2. Wilkins Manufacturing needs an additional P250,000, which it plans to obtain through a

factoring arrangement. The factor would purchase Wilkins' accounts receivable and

advance the invoice amount, less a 2% commission, on the invoices purchased each month.

(Wilkins sells on terms of net 30 days.) In addition, the factor charges 16% annual interest

on the total invoice amount; to be deducted in advance.

a. What amount of accounts receivable must be factored to net P250,000?

b. If Wilkins can reduce credit expenses by P1,500 per month and avoid bad debt losses of

3% on the factored amount, what is the total dollar cost of the factoring arrangement?