Question

Susie believes she could earn $12 an hour working full time at a local department store and receive annual raises of 3%. However, she could spend the next four years obtaining a college education. Currently, one year of college costs $15,000 and is expected to rise at an annual rate of 7%. Once she graduates with a degree in business, she thinks she could generate a starting salary of $55,000 with annual raises of 5%. Assuming all costs and wages/salaries are paid at the beginning of the year and full-time employment means 40 hours per week ( 52 weeks in a year), calculate the best route for Susie. While you should consider all raises and cost increases, ignore the time value of money when calculating the final answer. Round calculations to the nearest dollar.

Answer 1

To determine the best financial route for Susie, we must compare the total earnings she would make working immediately with the potential earnings after obtaining a college degree, while considering annual raises and the rising cost of college. The sum of earnings over four years without college would be $104,423, while the total cost of college is calculated at $66,600 without accounting for post-graduation earnings.

Step-by-step explanation:

Calculating the Financial Outcomes for Susie

To provide Susie with the best route financially, we must calculate her potential earnings in both scenarios over the same period.

Option 1: Working Full-time Without College
Susie would earn $12/hour working full-time. This amounts to $12 * 40 hours/week * 52 weeks/year = $24,960/year. With a 3% annual raise, her income in the next three years would be:

• Year 1: $24,960
• Year 2: $25,709 (24,960 * 1.03)
• Year 3: $26,480 (25,709 * 1.03)
• Year 4: $27,274 (26,480 * 1.03)

Option 2: Pursuing a College Education
For college, the first year costs $15,000. With a 7% increase, the remaining years' cost would be:

• Year 1: $15,000
• Year 2: $16,050 (15,000 * 1.07)
• Year 3: $17,174 (16,050 * 1.07)
• Year 4: $18,376 (17,174 * 1.07)

Susie's total college cost will be the sum of these four years, and upon graduating, she believes she could earn a $55,000 starting salary with annual raises of 5%. Therefore, her potential future earnings would need to be compared with the total earnings from working without a degree.

To compare these options, we sum the earnings for each route over the same period (four years), disregarding college costs and post-graduation earnings for now. For Option 1, the sum is $104,423. For Option 2, we only calculate the college costs, which total $66,600.