A company factored $100,000 of accounts receivables. The factor discounted the receivables by the interest for the one year it planned to take to collect the receivables. Using an annual interest rate of 9%, the present value of the receivables is $100,000 * 0.917 = $91,700. How much cash should the company expect to receive?

Rationale

The company should expect to receive $91,700.

The present value calculation accounts for the discount due to the interest rate applied to the accounts receivable, resulting in a cash amount of $91,700 that the company can expect to receive after factoring.

A ($91,700) CORRECT

This value represents the present value of the accounts receivable after applying the 9% discount rate for one year. The calculation of $100,000 multiplied by 0.917 accurately reflects the time value of money, indicating the amount of cash the company will receive immediately.

B ($108,300) YOUR ANSWER

This option incorrectly assumes that the company would receive more than the original accounts receivable amount. It fails to account for the discounting effect of the interest rate, which reduces the present value of future cash flows.

C ($100,000) YOUR ANSWER

Choosing this amount implies that the factor would not apply any discount to the receivables. However, factoring inherently involves a discount to reflect the time value of money and the risk associated with the receivables, so the company cannot expect to receive the full amount.

D ($91,000) YOUR ANSWER

This option is incorrectly calculated and underestimates the present value of the receivables. The correct present value calculation yields $91,700, not $91,000, indicating a misunderstanding of the discounting process.

Conclusion

When factoring accounts receivable, the present value reflects the discounted cash flow based on the interest rate and the time to collect. In this scenario, the company correctly calculates that it should expect to receive $91,700, which accurately accounts for the 9% interest over one year. Understanding these calculations is crucial for effective cash flow management in business operations.

The company should expect to receive $91,700.

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