Your Firm Has an Average Collection Period of 42 Days

question 85

Multiple Choice

Your firm has an average collection period of 42 days.Current practice is to factor all receivables immediately at a 4 percent discount.Assume that default is extremely unlikely.What is the effective cost of borrowing?

• A)28.79 percent
• B)36.20 percent
• C)37.78 percent
• D)40.97 percent
• E)42.58 percent

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Definitions:

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.

Total Expected Cost

A projection of the total costs associated with a project or business activity, including both fixed and variable costs.

Variable Costs

Costs that vary depending on the amount of production or business operations.

Lease Cost

The expense incurred from leasing equipment or property, typically categorized as an operating expense in financial statements.