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In order to convert Account Receivable into faster cash, acompany can sell its accounts receivable to another company, calleda factor, at a discount. Assume your average credit sales are $50million per year and average accounts receivable are $5 million. Afactoring company offers you an agreement that it will be buyingyour accounts receivable at a 2.20% discount. Your bank offers youa credit at R% per year (actual yearly rate). What would be theminimum R% for which you would choose factoring? That is, what isthe rate R% offered by the bank at or below which you would ratherborrow money from the bank instead of factoring? Express youranswer as a percentage.
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