Question

In a short essay , Write on the topic "My personal discount rate is ..." for engineering economy .

Answer 1

The concept of discount rate refers to the interest rate that makes my future money, equivalent to monetary value in present time. It means that discount rate is used to link future cash flows with the present worth of money. As far as my discount rate is concerned, my discount rate is the rate that is free from inflationary risk and give a predetermined value of the money invested. In this regard, my discount rate will be the sum of  interest rate given by the treasury bonds, inflation rate in the economy as well as a risk premium if any that is associated with the risky investments. It will help to achieve a discount rate that will give me a suitable return upon my investment.

As per the Fischer equation,

Real interest rate = Nominal interest rate - inflation rate

Hence, considering inflation rate in my discount rate can give immunity from the decrease in purchasing power due to rise in the price level in the economy. This discount rate will help me to assess the opportunities of investments and find the right investment case.

Besides, higher education is also an investment to develop the human capital that will give return in the coming years. It should be calculated using the investment done and discounting of the compensation packages being offered. The discounting of salaries over a period of time to match the investment of present time, will give my discount rate of investments in higher education.