A contractor faces a cash flow shortage and needs to decide between two options: factor receivables at 3% discount or take a bank loan at 8% annual interest for 60 days. Which option has the lower effective cost?
Correct Answer
C) Bank loan (8% annual interest for 60 days)
Bank loan cost for 60 days = 8% × (60/365) = 1.32%. Factoring costs 3% immediately. The bank loan has a lower effective cost.
Why This Is the Correct Answer
Bank loan cost for 60 days = 8% × (60/365) = 1.32%. Factoring costs 3% immediately. The bank loan has a lower effective cost.
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