The Quality Sign Co. of Visalia, California, provides credit to customers. The firm is currently averaging receivables of $34,500. The business needs an additional truck-mounted crane to keep up with its rapidly growing business. Quality's owner, George McElroy, has worked up an estimate of the cost of a suitable crane, which is presented in the chart below. Quality's bank is willing to loan 90 percent of the purchase price of the truck, crane, and equipment. All of Quality's currently available cash is needed as working capital and is not available to invest in this project. As a result, Quality must find a way to finance the 10 percent that the bank will not loan, plus the other costs of acquisition.

Quality has contacted a factor that has offered to pay 80 percent for all accounts that are less than 60 days past due. The factor is also willing to act as a collection agency for those accounts that are 60 or more days past due for a fee of 25 percent of the amount collected. Alternatively, Quality's bank has agreed to make a 90-day loan discounted at 12 percent interest in the amount of $32,100, secured by 100 percent of outstanding receivables. The sum of $32,100, which includes accrued interest, is due on the 90th day after the loan is made. During the 90-day loan, all new receivables will be pledged to the bank as they are incurred. Quality will continue to collect the receivables in the normal course of business.

Examine the financial statement provided below and prepare a recommendation to Mr. McElroy.

Cost of Acquiring Mobile Crane Accounts Receivable

Ford F750 Tandem truck $ 73,000 Current $ 34,500

120-ft heavy-duty crane $ 67,000 >30 days $ 6,000

Hydraulic outriggers $ 12,500 >60 days $ 5,000

Hydraulic pump $ 8,000 >90 days $ 4,000

30-ft truck bed $ 5,000 Delinquent $ 4,000

Installation of bed $ 1,500 _________________________

Delivery $ 1,500 Total Receivables $ 53,500

Sales Tax $ 12,338

License $ 1,000

_______________________________

Total acquisition cost $ 181,838

Answer rating: 100% (QA)

recommendation plan Cost of crane ord F750 Tandem truck 7300000 Bank l... View the full answer