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Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?

Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?
Transcribed Image Text:Problem 3 - The Barnes Corp. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources of funds: a. Trade Credit: the company buys about $50,000 of materials per month on terms 3/30, net 90. Discounts are taken. b. Bank Loan: the firm's bank will lend $100,000 at 13%. A 10% compensating balance will be required, which otherwise would not be maintained by the company. c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75% of the face value of the receivables at 12% on annual basis. The factor will also charge a 2% fee on all receivables purchased. It has been estimated that the factor's services will save the company a credit department expense and bad debt expense of $1,500 per month. On the basis of annual percentage cost, which alternative should be selected?
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