Cooley Industries needs an additional $500,000, which it plans to obtain through a factoring arrangement. The factor would purchase Cooleys accounts receivables 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.

1. What amount of accounts receivable must be factored to net $500,000?

2. If Cooley can reduce credit expenses by $3,500 per month and avoid bad debt losses of 2.5 percent on the factored amount, what is the total dollar cost of the factoring arrangement?

3. What would be the total cost of the factoring arrangement if Cooleys funding needs rose to $750,000?

Would the factoring arrangement be profitable under these circumstances? (assume Cooley could still reduce expenses by $3,500 per month and avoid bad debt losses of 2.5%)

4. Would it be to Cooleys 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? (Assume the firm needs $500,000 and there is no reduction of monthly expenses and bad debt losses are not avoided)

5. Assume a commission of 2 percent and an interest rate of 12 percent. What would be the total cost of the factoring arrangement if Cooleys funding needs rose to $650,000?

Would the factoring arrangement be profitable under these circumstances? (Assume not reduction of monthly expenses and bad debt losses are not avoided)

Funds needed Commission (%) Interest rate Credit period (months) Reduction in expenses Reduction in bad debt losses