Question

Eileen is a risk neutral consultant, doing work for acme, inc. The company offers her a choice of two compensation plans. Under plan a she receives $25,000 today. Under plan b she receives $10,000 today, $10,000 one year from today, and 10,000 two years from today. She will be indifferent between these plans if her rate of time discount equals ________ percent. If her rate of time discount is less than this amount she will opt for plan ______.

Answer 1

She will be indifferent between these plans if her rate of time discount is equals 21 percent. If her rate of time discount is less than this amount she will opt for a plan B.

What is discount rate?

The bank rate, sometimes known as the discount rate in American English, is the interest rate charged by a central bank on its loans and advances to commercial banks.

In a discounted cash flow (DCF) analysis, the discount rate is the interest rate used to calculate the present value of future cash flows. This helps establish whether the future cash flows from a project or investment will be worth more than the initial capital outlay required to support the project or investment.

The discount rate is an essential measure of an economy's credit situation.

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