The finance director of Westlife Bhd has been looking to improve the company’s working capital management. Westlife Bhd

[answerhappygod]

The finance director of Westlife Bhd has been looking to improve
the company’s working capital management. Westlife Bhd has revenue
from credit sales of RM30,750,000 per year and although its terms
of trade require all credit customers to settle outstanding
invoices within 40 days, on average customers have been taking
longer. Approximately 1% of credit sales turn into bad debts which
are not recovered.
Trade receivables currently stand at RM5,450,000 and Westlife
has a cost of short-term finance of 5% per year.
The finance director is considering a proposal from a factoring
company, Air Supply Bhd, which was invited to tender to manage the
sales ledger of Westlife Bhd on a with-recourse basis. Air Supply
believes that it can use its expertise to reduce average trade
receivables days to 35 days, while cutting bad debts by 80% and
reducing administration costs by RM70,000 per year. A condition of
the factoring agreement is that the company would also advance
Westlife 80% of the value of invoices raised at an interest rate of
8% per year. Air Supply would charge an annual fee of 0·55% of
credit sales.
Assume that there are 360 days in each year.
Required:
(a) Advise whether the factor’s offer is financially acceptable
to Westlife Bhd.
(7marks)