I am currently learning Finance and came across the concept of calculating the Present Value of $$. I understand the formula and I want to know how do we decide what interest rate is supposed to be considered while calculate the PV. Thanks.|||The calculations are comparisons between alternatives, technically it would be the rate that you would realize on your investments had you not chosen the investment that you are analyzing and hence quite often it would be your historical portfolio rate or the "required" rate. It can also be the rate of a known alternative with a known guaranteed return referred to as the "risk free" rate. If your concern is about purchase power hence keeping up with inflation, then the rate of inflation may be used. A corporation making a financial decision funded by retained earnings may use their dividend rate or a weighted extrapolation on all the debt issued by the corporation. It's really a matter of how you wish to interpret your financial decision that determines what rate to use but most people don't give a lot of thought to what rate to use and would just use the 10 year US Treasury bond rate as a proxy for an available risk free rate.|||'Whatever you want it to be' is not entirely accurate. You can use any discount rate that you wish, that is true, but usually for capital budgeting project evaluation you would use the company's 'weighted average cost of capital', which is a measure of the cost of financing based upon the company's financing mix (ie debt, common equity etc).
Ta|||It's whatever you want it to be. If you think you can make ten percent with some competing investment, be it real estate, stocks, or restaurants, that's your interest rate.
It's what you demand as a return.
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