CAPITAL INVESTMENT DECISIONS AND THE TIME VALUE OF MONEY
Dominic Hunter, a second- year business student at University of Utah, wll graduate in two years with an acoounting 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 next summer. That position will pay $550.
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
TUTOR (please answer these two questions thoroughly, examples in accounting would be good):
#1 Suppose that Hunter ignores the time value of money in decision 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 non quantitative factors might Hunter consider? What would you do if you were faced with these alternatives?
#2 Now suppose that Hunter considers the time value money for all cash flow that expects to receive one year or more in the future. Which alternative does this consideration favor? Why?