At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be
A) the nominal rate of interest.
B) the real rate of interest.
C) the rate of inflation.
D) zero.

Question

Quizplus · Accepted Answer

When considering inflation-adjusted amounts, it is important to use the real rate of interest. This accounts for the impact of inflation on both the costs and the benefits involved. Using the nominal rate of interest or rate of inflation alone would not provide an accurate assessment of the value of Joe's decision. The discount rate should reflect the real return on investment considering the inflation. Therefore, B is the best choice.

At Age 40,Joe Is Considering Quitting His Job and Going