Question

Two people quit work and begin college at the same time. Their salary and education information is given in the table below.

Salary prior to school
Years attending college
Total cost of college
Salary upon graduating
Person A
$18,000
3
$45000
$33,000
Person B
$27,000
4
$30,000
$37,000

Choose the true statement.
a.
Person A recovers their investment in a shorter amount of time.
b.
Person B recovers their investment in a shorter amount of time.
c.
They recover their investments in the same amount of time.
d.
There is too little information to compare the time to recover their investments.

Answer 1

Compute each person's total investment = tuition + forgone wages, and annual payoff = (salary after) − (salary before).

Person A:
- Forgone wages = 18,000 × 3 = 54,000
- Total investment = 45,000 + 54,000 = 99,000
- Annual benefit = 33,000 − 18,000 = 15,000
- Payback time = 99,000 / 15,000 = 6.6 years

Person B:
- Forgone wages = 27,000 × 4 = 108,000
- Total investment = 30,000 + 108,000 = 138,000
- Annual benefit = 37,000 − 27,000 = 10,000
- Payback time = 138,000 / 10,000 = 13.8 years

Since Person A’s payback time (≈6.6 years) is shorter than Person B’s (≈13.8 years), answer: a.