WC Company, a manufacturing organisation, is in the process of reducing its working capital requirement as the company is becoming overcapitalise. Sales for the year are £35.2 million, and...

WC Company, a manufacturing organisation, is in the process of reducing
its working capital requirement as the company is becoming
overcapitalise.

Sales for the year are £35.2 million, and receivables stand at $4.5
million. The company presently pays 9%
interest on its bank overdraft.

A factor has offered to take over the
administration of trade receivables on a non-recourse basis for an annual fee
of 2% of credit sales. The factor will
maintain a trade receivables collection period of 30 days, and WC Co will save
$100,000 per year in administration costs and $380,000 per year in bad
debts. The factor would advance 80% of
the face value of receivables at an annual interest rate of 7%

Required:

Evaluate the factor’s offer and hence determine
whether it would be worthwhile for the company to factor in its receivables.