ABSTRACT
The purpose of this chapter is to answer the question “What is the best interest rate for analysis?” This seemingly simple question is, actually, quite challenging to solve. Many organizations address this problem by using subjective or heuristic techniques. However, a more rigorous method and philosophy can be leveraged to arrive at a useful rate valuable for specific analysis. In the previous chapters, topics covered included the time value of money and techniques for choosing between competing alternatives. Making the best decisions becomes the chief concern as firms or individuals face financial options. However, the time value of money strongly influences all choices. With most engineering economy texts, the concept of interest is used extensively without practical consideration of its origin. Often the estimation of cash flows is well understood and can be replicated in the “real world” with ease. Many economic factors are easily translated to a model or ledger, such as costing or demand forecasting. However, the same is often not true of interest.
