Accounting 103
ScrawnyOcean2290 asked
Dominic Hunter, a second-year business student at the University of Utah, will graduate in two years with an accounting major and a Spanish minor. Hunter is trying to decide where to work this summer. He has two choices: work full-time for a bottling plant or work part-time in the accounting department of a meat-packing plant. He probably will work at the same place next summer as well. He is able to work 12 weeks during the summer.
The bottling plant will pay Hunter $380 per week this year and 7% more next summer. At the meat-packing plant, he could work 20 hours per week at $8.75 per hour. Hunter believes that the experience he gains this summer will qualify him for a full-time accounting position with the meat-packing plant next summer. That position will pay $550 per week.
Hunter sees two additional benefits of working part-time this summer. By working only part-time, he could take two accounting courses this summer (tuition is $225 per hour for each of the four-hour courses) and reduce his studying workload during the Fall and Spring semesters. Second, he would have the time to work as a grader in the university’s accounting department during the 15-week fall term and make additional income. Grading pays $50 per week.
Requirements
1. Suppose that Hunter ignores the time value of money in decisions that cover this short time period. Suppose also that his sole goal is to make as much money as possible between now and the end of next summer. What should he do? What nonquantitative factors might Hunter consider? What would you do if you were faced with these alternatives?
2. Now suppose that Hunter considers the time value of money for all cash flows that he expects to receive one year or more in the future. Which alternative does this consideration favor? Why?
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1. To determine what Dominic Hunter should do in order to make as much money as possible between now and the end of next summer, we need to compare the earnings from both options and consider any nonquantitative factors that may be relevant.
Option 1: Working at the bottling plant
- Earnings: $380 per week this year, and 7% more next summer (let's assume $407.60 per week next summer)
- Total earnings for 12 weeks this summer: $380/week * 12 weeks = $4,560
- Total earnings for next summer: $407.60/week * 12 weeks = $4,891.20
Option 2: Working part-time in the accounting department of the meat-packing plant
- Earnings: $8.75 per hour, working 20 hours per week
- Total earnings for 12 weeks this summer: $8.75/hour * 20 hours/week * 12 weeks = $2,100
In addition to the earnings, there are a couple of nonquantitative factors to consider:
- Experience: Hunter believes that the experience gained by working in the accounting department of the meat-packing plant this summer will qualify him for a full-time accounting position next summer, which pays $550 per week.
- Reduced studying workload: By working part-time, Hunter can take two accounting courses this summer and reduce his studying workload during the Fall and Spring semesters.
Considering the above factors, if I were faced with these alternatives, I would lean towards option 2 (working in the accounting department of the meat-packing plant). This is because the potential for a higher-paying full-time accounting position next summer, as well as the opportunity to reduce studying workload and make additional income as a grader in the university's accounting department during the Fall term, provide long-term benefits that outweigh the higher immediate earnings from the bottling plant.
2. When considering the time value of money for all cash flows that Hunter expects to receive one year or more in the future, we need to account for the fact that the future value of money is generally higher than its present value due to potential investment returns.
Applying this concept, the higher earnings from the bottling plant next summer would be worth more in present value terms compared to the higher earnings from the accounting position at the meat-packing plant. This is because the bottling plant is offering a 7% increase in pay, which accounts for the time value of money.
Therefore, considering the time value of money, the decision would favor working at the bottling plant as it offers higher earnings in present value terms.