Quality Sign Company The Quality Sign Co. of Visalia, California, provides credi
ID: 2471886 • Letter: Q
Question
Quality Sign Company
The Quality Sign Co. of Visalia, California, provides credit to customers. The firm is currently averaging receivables of $34,500. The business needs an additional truck-mounted crane to keep up with its rapidly growing business. Quality's owner, George McElroy, has worked up an estimate of the cost of a suitable crane, which is presented in the chart below. Quality's bank is willing to loan 90 percent of the purchase price of the truck, crane, and equipment. All of Quality's currently available cash is needed as working capital and is not available to invest in this project. As a result, Quality must find a way to finance the 10 percent that the bank will not loan, plus the other costs of acquisition.
Quality has contacted a factor who has offered to pay 80 percent for all accounts that are less than 60 days past due. The factor is also willing to act as a collection agency for those accounts that are 60 or more days past due for fee of 25 percent of the amount collected. Alternatively, Quality's bank has agreed to make a 90-day loan discounted at 12 percent interest in the amount of $32,100, secured by 100 precent of outstanding receivables. The sum of $32,100, which includes accrused interest, is due on the 90th day after the loan is made. During the 90-day loan, all new receivables will be pledged to the bank as they are incurred. Quality will continue to collect the receivables in the noraml course of business.
Examine the financial statement provided below and prepare a reccomendation to Mr. McElroy.
Cost of Acquiring Mobile Crane Accounts Receivable
Ford F750 Tandem truck $ 73,000 Current $ 34,500
120-ft heavy-duty crane $ 67,000 >30 days $ 6,000
Hydraulic outriggers $ 12,500 >60 days $ 5,000
Hydraulic pump $ 8,000 >90 days $ 4,000
30-ft truck bed $ 5,000 Delinquent $ 4,000
Installation of bed $ 1,500 _________________________
Delivery $ 1,500 Total Receivables $ 53,500
Sales Tax $ 12,338
License $ 1,000
_______________________________
Total acquisition cost $ 181,838
Explanation / Answer
recommendation plan Cost of crane ord F750 Tandem truck 73,000.00 Bank loan of 90% and 90 day loan+factor 120-ft heavy-duty crane 67,000.00 250,200.00 90% of equipment cost Hydraulic outriggers 125,000.00 31,137.00 90 day including acrued interest@12% with pleadge of new receivables and 100% of O/S receivables Hydraulic pump 8,000.00 281,337.00 30-ft truck bed 5,000.00 factor installation of bed 1,500.00 250,200.00 90% of equipment cost Delivery 1,500.00 4,800.00 factor -80% less than 60days including current Sales Tax 12,338.00 6,750.00 factor- more than 60 days@ 25% fees License 1,000.00 261,750.00 Total 294,338.00 so with bank co has to get the balance from Current AR= $13,001 so with Factor the co has to get the balance from current AR=32,588