Read the case given below and answer the questions given at the end.

CASE STUDY – II

The Udar Ltd. sells goods on credit. Its current annual credit sales amounts to Rs 900 lakh. The variable cost ratio is 80%. The credit terms are 2/10, net 30. On the current level of sales , the bad debts are 0.75%. The past experience has been that 50% of the customers avail of the cash discount, the remaining customers pay on an average 50 days after the date of the sale. The book debts of the firm are presently being financed in the ratio of 2:1 by a mix of bank borrowings and owned funds which cost 25% and 28% per annum respectively. As an alternative to the in house management of receivables, Udar Ltd. is contemplating use of full advance non•]recourse factoring deal with the Indbank Factors Ltd. The main elements of such a deal structured by the factor are:

• Factor reserve 15%
• Guaranteed payment date 24 days after the purchase
• Discount charge 22%
• Commission of other services 4% of the receivables.

Analyse the proposal