The PARADOX Corporation Ltd. Needs Tk. 1,00,00,000 As Working Capital. The Following Three Alternative Methods Of Financing Are Available

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The PARADOX Corporation Ltd. needs Tk. 1,00,00,000 as working capital. The following three alternative methods of financing are available

To select the best financing method for PARADOX Corporation Ltd., we evaluate the effective annual cost of financing for each of the three options.

Option i: Forgoing Cash Discount (Trade Credit)

Credit Terms:
Discount Period:
Net Credit Period:
Borrowing Period:

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Option ii: Commercial Paper

Face Value: Tk. 1,000
Selling Price: Tk. 950
Maturity Period: 180 days
Flotation Cost:
Net Proceeds per CP:

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Option iii: Factoring Accounts Receivable

Total Credit Sales: Tk. 1,00,00,000
Average Accounts Receivable: Tk. 25,00,000
Advance Rate ():

1. Annual Costs:

Factoring Commission ( on sales):
Interest on Advance ( per annum):
Administrative Cost ():
Total Gross Annual Cost:

2. Annual Savings:

Bad Debt Saved ( on sales):

3. Net Annual Cost & Percentage Cost:

Net Annual Cost:

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Comparison Summary Table

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Financing Option	Effective Annual Cost
Option i: Trade Credit	15.38%
Option ii: Commercial Paper	16.22%
Option iii: Factoring Accounts Receivable	15.10%

Final Recommendation & Decision:

Option iii (Factoring Accounts Receivable) should be selected.

Reason:

Option iii has the lowest effective annual cost of financing (15.10%) compared to Option i (15.38%) and Option ii (16.22%). Additionally, factoring transfers credit collection management and bad debt losses to the factor, reducing the firm’s administrative burden and risk.

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