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Ted Christensen, a second-year business student at the University of Utah, will graduate in two...

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Ted Christensen, a second-year business student at the University of Utah, will graduate in two years with an accounting major and a Spanish minor. Christensen 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 would pay Christensen $380 per week this year and 7% more next summer. At the meat-packing plant, he would work 20 hours per week at $8.75 per hour. By working only part time, he would take two accounting courses this summer. Tuition is $225 per hour for each of the four-hour courses. Christensen 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.

Christensen sees two additional benefits of working part time this summer. First, he could reduce his studying workload during the fall and spring semesters by one course each term. Second, he would have the time to work as a grader in the university's accounting department during the 15- week fall term. Grading pays $50 per week.

Based on your reading, answer the given questions:

a. Suppose that Christensen ignores the time value of money in decisions that cover such a 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 Ted consider? What would you do if you were faced with these alternatives?

b. Now, suppose that Christensen 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 favour? Why?

Accounting Department:

The accounting department is an important department within every organization, which focuses on maintaining the financial records of the organization and also maintaining payroll, conducting financial analysis, etc.

Answer and Explanation:

1) Bottling company:

End of current summer:

Payment per week = $380

Number of working weeks = 12 weeks

Total earnings = 380 * 12 weeks

= $4,560

Thus, the total earnings are $4,560

End of next summer:

7% more than previous summer

7% earnings = $4,560 * 7 %

= $319

Last summer's earnings = $4,560

Next summer's earnings = previous earnings + 7 % more than the previous earnings

= 4560 + 319

= $5,879

Meat packing plant (Part time)

End of current summer:

Payment per hour = $8.75

Number of working hours = 20 hrs per week

Number of weeks = 12 weeks

Total hours = 20 * 12 weeks

= 240 hrs.

Total earnings = 8.75 * 240

= $2,100

Fall time (15 days) as grader:

Payment per week = $50

Number of weeks = 15

Total earnings = $50 * 15 weeks

Total earnings = $750

Total earnings of this summer = 2,100 + 750

= $2,850

b)

Calculating the present value:
Year PV factor @7% Cash inflows ($) PV cash inflows ($) Number of weeks Total of cash inflows($)
1 0.935 380 355.3 12 4,263.30
2 0.873 380 331.74 12 3,980.80
Total amount 8,244.40

Meat packing company
Year PV factor @7% Cash inflows ($) PV cash inflows ($) Number of weeks Total of cash inflows($)
1 0.935 240 224.4 12 2,688
1 0.935 50 46.75 15 701.25
2 0.873 550 480.15 12 5,761.80
Total amount 9,151.80


Learn more about this topic:

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Roles & Responsibilities of an Accounting Department

from Basics of Accounting

Chapter 2 / Lesson 7
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