Nixon Enterprises is experiencing a temporary shortage of cash. To cover the shortage, the financial vice president of the company proposed that some of the company s accounts receivable be sold (factored). A factoring company has offered to buy up to $2 million of the company s receivables on a without recourse basis at a fee of 16% of the amount factored. As an alternative, another vice president of the company has proposed borrowing an equivalent amount from South Willow Bank, pledging the outstanding receivables as collateral for the loan. Under the terms of the borrowing agreement, Nixon Enterprises would receive 80% of the value of all receivables assigned to the bank and would be charged a 1% loan origination (service) fee based on the actual dollar amount of cash received and 12% annual interest on the outstanding loan. The company estimates that the loan will be repaid in two months. Evaluate the two alternatives. Which one is better from the company s perspective?
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