AICPA Exam CPA-Business Topic 1 Question 26 Discussion

A company enters into an agreement with a firm who will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average $100,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at an annual rate of 10 percent and charge a fee of 2 percent on all receivables purchased. The controller of the company estimates that the company would save $18,000 in collection expenses over the year.

Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?