Kelsey Gerbig, a second-year business student at the University of Utah, will graduate in two years with an accounting major and a Spanish minor. Gerbig is trying to decide where to work this summer. She has two choices: work full-time for a bottling plant or work part-time in the accounting department of a meat-packing plant. She probably will work at the same place next summer as well. She is able to work twelve weeks during the summer.
The bottling plant would pay Gerbig $380 per week this year and 7% more next summer. At the meat-packing plant, she would work 20 hours per week at $8.75 per hour. By working only part-time, she could take two accounting courses this summer. Tuition is $225 per hour for each of the four-hour courses. Gerbig believes that the experience she gains this summer will qualify her for a full-time accounting position with the meat-packing plant next summer. That position will pay $550 per week.
Gerbig sees two additional benefits of working part-time this summer. First, she could reduce her studying workload during the fall and spring semesters by one course each term. Second, she would have the time to work as a grader in the university's accounting department during the fifteen-week fall term. Grading pays $50 per week.
Requirements
1. Suppose that Gerbig ignores the time value of money in decisions that cover this short of a time period. Suppose also that her sole goal is to make as much money as possible between now and the end of next summer. What should she do? What non-quantitative factors might Gerbig consider? What would you do if you were faced with these alternatives?
2. Now, suppose that Gerbig considers the time value of money for all cash fl ows that she expects to receive one year or more in the future. Which alternative does this consideration favor? Why?