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.
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Famous quotes containing the words choice of, choice, interest and/or rate:
“At birth man is offered only one choice—the choice of his death. But if this choice is governed by distaste for his own existence, his life will never have been more than meaningless.”
—Jean-Pierre Melville (1917–1973)
“You didn’t have a choice about the parents you inherited, but you do have a choice about the kind of parent you will be.”
—Marian Wright Edelman (20th century)
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—Joseph Featherstone (20th century)
“We all run on two clocks. One is the outside clock, which ticks away our decades and brings us ceaselessly to the dry season. The other is the inside clock, where you are your own timekeeper and determine your own chronology, your own internal weather and your own rate of living. Sometimes the inner clock runs itself out long before the outer one, and you see a dead man going through the motions of living.”
—Max Lerner (b. 1902)