Questions tagged [discount-rate]

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How can I show what a discount factor is a function of in a bargaining model?

I was reading Espinosa and Rhee (1989) and I was wondering how can the impact of exogenous changes on the discount factor can be shown mathematically. For example, if $A$ represents some exogenous ...
wannabe-econ-nerd's user avatar
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Does discount rate and cost of capital mean the same thing to compute levelised cost of energy (LCOE)?

I came to understand that cost of capital and discount rate are two different parameters, although they are also used ...
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The present value of exterminating the human race in 200 years: Can I afford it? Can you?

Exterminating the human race in 200 years ttime: Can I afford it? Can you? Suppose I am writing a paper trying to asses whether some large near-term capital investment with benefits spread out over a ...
andrewH's user avatar
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Short-sightednes and discounting: high or hyperbolic?

For many years I have encountered articles that attribute behavior that strikes their respective authors as irrationally short-sighted to hyperbolic discounting. I understand why such an author might ...
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How to properly indicate the reference year of NPV that is in the past?

Say we are in the year 2023. I have computed the NPV with Year 0 set in 2019. (Reason: for comparison of actual vs initial projection in 2019 basis period). What is the acceptable norm to quote the ...
Hellspawn79's user avatar
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What is the household i’s intertemporal budget constraint (utility depends on household consumption and neighbourhood's average consumption)?

Assume that household i derives utility from consumption, but now lifetime utility is given by the following expression: $$ U_i = \sum_{t=0}^{\infty} e^{ -\rho t}\frac{1}{1-\theta} \left(\frac{C_{i,t}}...
Delia's user avatar
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When is WACC appropriate to use?

I've found this MIT lecture notes that says that "The common intuition for using WACC (for NPV calculations) is that to be valuable the Project should raise more than it costs to raise the ...
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Question about how NPV was used in this 2010 Obama proposal

I'm looking at a 2010 Obama proposal to allow 100% expensing (i.e. allowing a capital good to 100% depreciate in the first year to allow it as a tax expense). Here's the proposal: https://...
Alexander Wallace Matchneer's user avatar
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Why does William Nordhaus' preferred discount rate differ from that of the Heritage Foundation and the 2003 OMB?

William Nordhaus, the designer of the DICE integrated climate and economic model, in the most recent estimate I can find, suggests a discount rate of 4.25% per year: With the current calibration, the ...
Philip Meyer's user avatar
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Time value of money: impatience, risk, inflation... and opportunity cost?

When explaining the time value of money (e.g. the fact that \$100 today is worth more than \$100 a year ahead), I have seen 3 arguments: impatience, risk and inflation. What about a fourth argument ...
Richard Hardy's user avatar
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What are the practical applications of infinite series to Perpetuity?

I've already know that you can derive present value formula of a perpetuity through infinite series. But, one can argue that it's not really practical since you can just use the derived formula. So, I ...
Lowell0803's user avatar
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What utility function represents an agent with a time-discount factor?

Consider an agent who has a fixed budget, and should decide how to split it between consumption today and consumption tomorrow. For simplicity, suppose there is no interest, and no borrowing/lending, ...
Erel Segal-Halevi's user avatar
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Why does the federal funds rate differ from the IOR rate?

If I am not mistaken, the federal funds rate is the rate at which commercial banks, money market funds and market makers pay for overnight US Treasuries. In theory, it should be equal to the IOR rate, ...
Cola's user avatar
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Question on notation

I need to write a couple of simple equations for a homework project. I wonder what the convention is with subscripts. I do not want to use Greek letters and keep it simple. I have a few variables such ...
A_Reinhardt's user avatar
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Practical values for project discount rate

Are there any practical values for the discount rate I should use to value a project? Of course, the discount rate depends on the project itself, but are there any reference points what are typical ...
Merwin's user avatar
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Goverment spending: how to calculate the discount rate for it? What is the opportunity cost of federal funds?

When discounting in order to obtain the present value, one has to determine the opportunity cost of capital. In this case, I don't want to do it for a project (or a comparison of two similar projects),...
babipsylon's user avatar
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What effects the time value of money

My question regards the rationale behind the Present Value computation of a single cash flow received after $n$ periods, $CF_{n}$. Most textbooks make the following statement: $$PV =\frac{CF_{n}}{(1+x)...
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Comparing rates of return for different assets using $V=Pe^{rT}$

I have been playing with $V=Pe^{rT}$ and have been thinking about how to apply it to situations involving different assets growing at different rates. Suppose I had data for the historic sale prices ...
s7eqx9f74nc4's user avatar
2 votes
0 answers
46 views

Hyperbolic Discount function

I'm trying to determine my hyperbolic discount function for a given set of my own time preferences. I have determined that I am indifferent between {$}1000 today and {$}1004 tomorrow; {$}1000 today ...
CorporateNationalism's user avatar
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Due-diligence behind discount window lending

Its clear the Federal reserve is doing risk assessments at the discount window since they separate credit into primary and secondary. I'm curious how secondary credit risk is handled. Given that ...
curiousgeorge's user avatar
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Rationale and Methodology for Discounting the Investment in an NPV Calculation

It is clear to me why the benefits accruing from an investment should be discounted. What I wish to understand is what the correct way discount the investment itself is. Assuming zero inflation, ...
Anthony's user avatar
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Discounting terminology confusion

An example of the terminology that surrounds discounting that confuses me can be found in "Investment and Hysteresis" by Dixit: Let future revenues be discounted at a positive rate $\rho &...
Anthony's user avatar
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1 vote
4 answers
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Discount & Interest rates

Small question, is discount rates and interest rates the same/similar thing in economics? A bit confused regarding this.
MBA's user avatar
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1 answer
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How does the federal funds rate compare to the federal discount rate?

The federal funds rate is the interest rate charged to banks when they borrow from each other overnight in the federal funds market to satisfy their reserve requirements. This rate is influenced by ...
Tan Yong Boon's user avatar
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1 answer
901 views

What is the difference between the discount window and Fed repos?

I'm wondering how the Fed's discount window differs from it's involvement in the repo market. To the best of my knowledge, both are tools used to conduct monetary policy and both are also short-term, ...
Sylith's user avatar
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discount factor, function, and rate

Consider an exponential discount factor $\delta\in(0,1)$. Similarly, consider an exponential discount $\textit{function}$: $g(t)=\delta^t$. Then, is defining the discount $\textit{rate}$ as below a ...
Frank Swanton's user avatar
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1 answer
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Interpeting equivalent annual cash flows

So i have this question: RainMan Inc. is in the business of producing rain upon request. They must decide between two investment projects; a new airplane for seeding rain clouds or a new weather ...
Sara Salvante's user avatar
1 vote
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132 views

Why is there a stochastic discount factor in firms present value?

In a book I am reading, the problem of the firms is described as maximizing current market value of profits. $$\max \sum_{k=0}^\infty \Delta_{t, t+k} \cdot "\text{profits in period k}"$$ So, ...
James's user avatar
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2 answers
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Yield To Maturity exact meaning

From investopedia: "YTM is the total return anticipated on a bond if the bond is held until it matures" I have also seen this interpretation used in other sources however this seems wrong to me. ...
Liarokapis Alexandros's user avatar
2 votes
1 answer
534 views

Calculate optimal discount for product bundling

So recently I made some rules with my transaction data. Based on it I can determine which products are profitable to bundle it together. But even though I know e.g. product A→ product B, are there ...
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Rationale for discounting

I am interested in understanding the rationale behind discounting in the context of government policy appraisal. As far as I understand it, there are three main components to the discount values ...
hmmmm's user avatar
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Why would a rise in the discount rate stop foreign gold drain and make banks fail?

I am reading "Capitalism and Freedom" by Milton Friedman. In Chapter 3, "The control of Money", Dr. Friedman explains how the Fed exacerbated the Great Depression of the 1930s. In particular: In ...
robertspierre's user avatar
1 vote
1 answer
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Is there any investment model with time-varying depreciation rate?

Is there investment model with different depreciation rate. For example, d1(depreciation rate in 1 period), d2(depreciation rate in 2 period)
Sheev Palpatine's user avatar
4 votes
1 answer
290 views

International Capital Asset Pricing Model (CAPM)

I wanted to value a High-tech start-up of which I have the cash flows of the coming 6 years. I decided to use the Discounted Cash Flow Method. To do so, I calculated the Discount rate. For a High-...
Vlosp's user avatar
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1 answer
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McCall Search Model: Present value of lifetime income

In the Bellman for the search model, how is the present discounted value of future income equal to $\frac{w}{1-\beta}$? Sounds like a basic question but I just can't comprehend the math in my head, ...
user400860's user avatar
3 votes
1 answer
81 views

What factors affect the temporal discount rate individuals apply in decision making?

Discount rate is rate at which actors will value something that occurs in the future at less than its value now. A simple hypothetical test that would determine this would be: 'Would you rather ...
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