Interest rates used in the present value or future value formula can also be called discount rate. When considering an investment, it is appropriate to use the opportunity cost of putting your money elsewhere as your interest rate.
This is calculated as:
Opportunity Cost = FO−CO
where:
FO= Forgone option
CO= Chosen option
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These ideas explain the importance of time value considerations in making investment decisions.
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Opportunity cost is the loss of potential gain from other choices when one alternative is chosen.
Every time you decide to buy something, you choose to lose out on investing that money. If you buy a brand new car you don't need for $30,000, you're missing out ...
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