EAR Effective Cost Your firm has an average collection period of 32 days.

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EAR Effective Cost

Your firm has an average collection period of 32 days.
 Current practice is to factor all receivables immediately at a discount of 1.3 percent.
Assume that default is extremely unlikely and that there are 365 days in a year.

Average Collection Period 32
Discount 0.013
Year        365

What is the effective cost of borrowing in this case?

Number of Periods 11.40625 (Year / Average Collection Period)
EAR = (1 + (Discount rate/1-Discount rate ))^#number of periods – 1
1-Discount 0.987
EAR 0.160967273