Question

If Faith attends college, it will take her four years, during which time she will earn no income. She will pay $50,000 for tuition, $12,000 for room and board, and $5,000 for books. If she spends the four years working rather than attending college, she will pay $18,000 for room and board, pay no intuition, and buy no books. Based on this information, Faith's economic cost of attending college would be $67,000 if, over the four years, she could earn

A. $12,000 instead of attending college.
B. $18,000 instead of attending college.
C. $14,000 instead of attending college.
D. $16,000 instead of attending college.

Answer 1

Answer:

The answer is: B) $18,000 instead of attending college

Explanation:

Since the question doesn´t state an Internal rate of return for Faith´s money we will assume it is 0. So to calculate a cash flow for Faith going to college we add $50,000, $12,000 and $5000 to a total of $67,000. If she doesn´t attend college then her living cost will be $18,000 per year, it is almost as expensive to not attend college as to attend college ($72,000 in four years). So if she works instead and earns $18,000 per year, she will be able to balance her expenses to 0 per year. So the college option has an economic cost of $67,000 which should be offset once she graduates and probably gets a better job, not one that only pays $18,000 per year.