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Originally Posted by asquare
user_name, you're still misunderstanding the point about discounting. It's an additional adjustment for the consumer's impatience, above and beyond the interest rate. So when you put in the interest rate, you are accounting for the fact that the $40,000 could have been invested at a return (of 4%, in your example) but you are not accounting for the fact that even if the interest rate was 0, you'd still have to pay me more than $1000 tomorrow to make me indifferent to giving up $1000 today. The discount rate and the interest rate are not the same thing. Does that make sense?
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The interest rate was used in the formula A/r as a discount rate. The interest rate is simply the discount rate whose time value of money is based on the impatience of an
average person. I assume
the OP was an average person, so as a matter of fact, the interest rate and the discount rate
are the same thing in this case.
If you divide A by the interest rate, and then discount it again, you're double-discounting.