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?

A) Increases NPV
B) Decreases NPV
C) NPV would not change as long as we use nominal costs and returns.
D) NPV may increase or decrease, and we cannot determine the direction of change without more information.

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Zybrea Knight · Accepted Answer

Final Answer : B, Explanation :  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.

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