Choice of Interest Rate
The interest rate used is the risk-free interest rate if there are no risks involved in the project. The rate of return from the project must equal or exceed this rate of return or it would be better to invest the capital in these risk free assets. If there are risks involved in an investment this can be reflected through the use of a risk premium. The risk premium required can be found by comparing the project with the rate of return required from other projects with similar risks. Thus it is possible for investors to take account of any uncertainty involved in various investments.
Read more about this topic: Present Value
Famous quotes containing the words choice, interest and/or rate:
“The fondness or indifference that the philosophers expressed for life was merely a preference inspired by their self-love, and will no more bear reasoning upon than the relish of the palate or the choice of colors.”
—François, Duc De La Rochefoucauld (1613–1680)
“For that’s what a woman, a mother wants—to teach her children to take an interest in life. She knows it’s safer for them to be interested in other people’s happiness than to believe in their own.”
—Marguerite Duras (b. 1914)
“At the rate science proceeds, rockets and missiles will one day seem like buffalo—slow, endangered grazers in the black pasture of outer space.”
—Bernard Cooper (b. 1936)