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Re: What is discount rate?

Posted by Satya Gabriel on October 10, 2001 at 00:43:21:

In Reply to: What is discount rate? posted by Cindy on October 9, 2001 at 17:19:25:

The discount rate is that rate of return required from an investment by the asset holder or manager in control of the investment. For example, if you are asked to make an investment of $1,000 in a business venture started by a friend, will you give up the $1,000 in agreement to receive $1,000 at some point in the future? Probably not. I would assume that you would want to receive more than $1,000. But how much more? In other words, what amount of money in this future period would be just enough to compensate you for giving up this $1,000 today (and giving it for use in this particular project)? Thinking forward (rather than backwards, as is implied by the discount rate) then if you know how much you want to make, say, one year from now, then you know the rate of return you require for this investment. The higher the rate of return you require, the more cash the investment will need to generate to satisfy you. It is also the case that the higher the rate of return you require, the faster you want your initial investment returned to you. In the case of investments in slaves (something which you would never do, but which is the basis for your question), higher discount rates would imply that the slaves need to generate more revenue (or equivalent value in goods and services) sooner in order to satisfy the requirements of those who have invested in them. This may imply, if the discount rate is high enough, working slaves considerably harder in the near term, even if their total lifespan is shortened by doing so. This might be the case, in particular, if slaves are assumed to be less productive in later years (such that the revenue generated is uneven and higher during certain "productive years" and then drops off as the slave ages beyond these years). Anything that adds to the risk that the slaves might not generate the necessary cash flows (or equivalent in goods and services) would likely raise the discount rate, indicating a desire on the part of the investor to get his money back sooner. You might want to think about conditions in which the risk is higher for the slave master and therefore their discount rate also higher.

: I'm a tad bit confused . . . what is a discount rate? I remember Prof. Gabriel saying that it's like an interest rate but can someone explain to me the fundamentals of that? Do the slave owners gain interest from investing in slaves so that's why they always try to load more slaves unto ships that meets the capacity?



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