Problem: Is Pursuing a College Education Worth It? And How Much Should Be Saved?
Gustav is trying to determine whether it makes sense for his son to attend college, and how much he should set aside for his education. He could use your help with the calculations, as he's very busy right now. Here's the information he's given you:
- His son, Casper, plans to take over the family business and wants a business degree, which will take four years.
- Casper is planning to start college in two years.
- The total cost of attending ETSU (including tuition and other college-related expenses) is $30,000 per year.
- If Casper doesn't attend college, he could earn $35,000 per year working. This is an opportunity cost that must be considered for an accurate estimation.
- Casper will not be working while attending college.
- After graduating, Casper expects to earn a starting salary of $75,000 per year.
- For simplicity, assume that Casper receives his salary once a year.
- All college payments are made at the beginning of the year.
- Casper plans to work for 40 years after graduation.
- For all calculations, assume an eight percent interest rate.
- For all calculations, assume calendar years.
Here's what Gustav needs your help with:
1. Is going to college a good decision based on the information provided? Need Assignment Help?
a. Calculate the total cost of attending college. (Assume the first salary would start at time 0.)
b. Calculate the benefits of going to college (Hint: Casper can earn $35,000 per year without a degree, so only the additional income - marginal benefits - should be considered. The salary is paid at the end of the year).
c. Compare the costs and benefits. What's your conclusion?
2. How much does Gustav need to save for Casper's full college expenses over the next two years? Find the annual savings amount, assuming that Gustav saves annually at the end of each period. He has already saved $80,000.
3. Gustav's daughter, Tess, is currently 10 years old and plans to become a nurse. For this calculation, assume the college tuition ($30,000) will increase by 2% annually until Tess enters college, at which point the cost will remain constant. How much does Gustav need to save each month for the next 8 years to cover Tess's college expenses? (Savings will be deposited at the end of each month.) Gustav will stop saving when Tess starts college in 8 years. Gustav has not saved anything for Tess.
4. What elements would you add to make the example more realistic? Name at least two.