ebo Lamps Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Lebo lamps experiences a bad-debt rate of 0.8% of debtors annually. The company's current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Lebo lamps Ltd has contacted MBD Ltd, a factoring firm, and has been quoted: A factor charge of 1.8% of credit sales (Lebo lamps Ltd estimates that this would save R25 000 administration costs per year)  An advance of 75% of invoices at 3% over base-rate. Should the factoring firm MBD Ltd terms be agreed to?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Lebo Lamps Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Lebo lamps experiences a bad-debt rate of 0.8% of debtors annually. The company's current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Lebo lamps Ltd has contacted MBD Ltd, a factoring firm, and has been quoted:

A factor charge of 1.8% of credit sales (Lebo lamps Ltd estimates that this would save R25 000 administration costs per year) 

An advance of 75% of invoices at 3% over base-rate.

Should the factoring firm MBD Ltd terms be agreed to?

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