The authors note that an appropriate discount rate for most U.S. households is near 5%. However, suppose you are considering the decision to attend graduate school, and you already have large credit card balances from your undergraduate years. If you decide to use a higher discount rate (e.g., 10%) to reflect your higher opportunity cost of money, what impact does this change in the discount rate have on the net present value of a graduate degree?

Question

Quizplus · Accepted Answer

Using a higher discount rate (in this case, 10% instead of 5%) would decrease the net present value of a graduate degree. This is because a higher discount rate places greater emphasis on the immediate costs of attending graduate school (e.g. tuition, lost wages from not working) rather than the long-term benefits (e.g. higher salary, better job opportunities). The higher opportunity cost of money from credit card debt may be a legitimate concern for some individuals, but it should not be used to justify an unrealistically high discount rate.

The Authors Note That an Appropriate Discount Rate for Most