Question

Explain the concept of discount rate using the concept of opportunity costs.

(Thanks. please explain what the connection between these two excepts.)

Answer 1

Discounting rate is the rate of interest through which present value of an investment is calculated while opportunity cost is the rate of interest which an investor can earn from next best alternative available to them.

Higher the discount rate, higher will be the opportunity cost attached to it. Assume net present value of 2 investment where one have 10 times higher present value than oher. Investment plan with lower net present value means higher discount rate which means investor have to forego high present value which implies higher opportunity cost.