Question 3.1: Estimating the Cost of a College Degree A simple example of ...
Estimating the Cost of a College Degree
A simple example of cost estimating is to forecast the expense of getting a Bachelor of Science (B.S.) from the university you are attending. In our solution , we outline the two basic approaches just discussed for estimating these costs.
A top-down approach would take the published cost of a four-year degree at the same (or a similar) university and adjust it for inflation and extraordinary items that an incoming student might encounter, such as fraternity / sorority membership, scholarships, and tutoring. For example, suppose that the published cost of attending your university is $15,750 for the current year. This figure is anticipated to increase at the rate of 6% per year and includes fulltime tuition and fees, university housing, and a weekly meal plan. Not included are the costs of books, supplies, and other personal expenses. For our initial estimate, these “other” expenses are assumed to remain constant at $5,000 per year. The total estimated cost for four years can now be computed. We simply need to adjust the published cost for inflation each year and add in the cost of “other” expenses.
| Year | Tuition, Fees, Room and Board | “Other” Expenses | Total Estimated Cost for Year |
| 1 | $15,750 × 1.06 = $16,695 | $5,000 | $21,695 |
| 2 | 16,695 × 1.06 = 17,697 | 5,000 | 22,697 |
| 3 | 17,697 × 1.06 = 18,759 | 5,000 | 23,759 |
| 4 | 18,759 × 1.06 = 19,885 | 5,000 | 24,885
——— |
| Grand Total | $93,036 |
In contrast with the top-down approach, a bottom-up approach to the same cost estimate would be to first break down anticipated expenses into the typical categories shown in Figure 3-1 for each of the four years at the university. Tuition and fees can be estimated fairly accurately in each year, as can books and supplies. For example, suppose that the average cost of a college textbook is $100. You can estimate your annual textbook cost by simply multiplying the average cost per book by the number of courses you plan to take. Assume that you plan on taking five courses each semester during the first year. Your estimated textbook costs would be
\left(\frac{5 course}{smester} \right) (2 semesters) \left(\frac{1 book }{course} \right) \left(\frac{\$100}{book } \right)= $1,000.
The other two categories, living expenses an transportation , are probably more dependent on your lifestyle. For example, whether you own and operate an automobile and live in a “high-end” apartment off-campus can dramatically affect the estimated expenses during your college years.
