411.1
1.What does the discount rate "r" represent? Explain why we use it to price money across time.
r represents our opportunity cost of money (what could we earn on our money in equivalent investments. Thus, if we want to price money across time, such as when we compare spending $100 today to get $110 tomorrow, we want to know what could we do with the $100 if we didn't take this investment. Using r to get the FV of the $100 if invested elsewhere tells us what our $100 would be worth in one year if invested elsewhere. Likewise, using r to discount the $110 back to today tells us how much money we would have to invest in our other opportunities earning r to have $110 in one year.