Financial Services
A Ltd. has an export sale of 2 50 crone of which 20°o is paid by importers in advance of dispatch and for balance the average collection period is 60 days. However, it has been observed that these payments have been running late by 18 days. The past experience indicates that bad debt losses are 0.6°0 on Sales. The expenditure incurred for efforts in receivable collection are 2 60,00,000 p.a.
So far A Ltd. had no specific arrangements to deal with export receivables, following two proposals are under consideration:
(i) A non-recourse export factoring agency is ready to buy A Ltd.'s receivables by charging n. commission. The factor will pay an advance on receivables to the firm at an Interest rate of MIBOR +1.75% alter withholding 20% as reserve.
(ii) lnsu Ltd. an Insurance company has offered a comprehensive Insurance policy at a premium of 0.45°0 of the sum insured covering 85% of risk of non-payment. A Ltd. can assign Its right to a bank in return of an advance of 75°, of the value Insured at MIBOR+1.50%.
Assuming that MIBOR is 6°. and A Ltd. can borrow from its bank at MIBOR+2°o by using existing overdraft facility determine the which of the two proposal should be accepted by A Ltd. (1 Year = 360 days).