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Inflation and Real Rate of Return

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ama2amal
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31 views3 pages

Inflation and Real Rate of Return

Uploaded by

ama2amal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
You are on page 1/ 3

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1 INFLATION AND THE REAL RATE OF INTEREST
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4 Interest rate
12.00%
5 Inflation rate
5.00%
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7 Real interest rate
6.67%
( 1 + Interest Rate ) / ( 1 + Inflation Rate ) - 1
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10 EXAMPLE
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12 Cash today
100.00
13 Plus interest
12.00
14 Cash next year
112.00
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16 Price today
106.67
17 Plus inflation
5.33
18 Price next year
112.00

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INFLATION AND CONSTANT DOLLAR FACTORS
Current price
Inflation rate
Year
Price
Inflation factor

200.00
5.00%
0

200.00
100.00%

210.00
105.00%

220.50
110.25%

231.53
115.76%

Inflation Factor = Previous Inflation Factor x ( 1 + Inflation Rate )


Price
Constant dollar factor
Price in constant dollars

200.00
100.00%
200.00

210.00
95.24%
200.00

220.50
90.70%
200.00

231.53
86.38%
200.00

Constant dollar factor = 1 / Inflation Factor


Constant dollar factor = Previous Constant Dollar Factor / ( 1 + Inflation Rate )

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NPV CAN BE CALCULATED IN NOMINAL OR REAL TERMS
Interest rate
Inflation rate
Real interest rate
Year

12.00%
5.00%
6.67%
0

Cash flow
PV factor
PV of cash flow
Cumulative PV
NPV

(400,000) 100,000 200,000


100%
89%
80%
(400,000)
89,286 159,439
(400,000) (310,714) (151,276)
62,259

300,000
71%
213,534
62,259

Cash flow
Constant dollar factor
Real cash flow
Real PV factor
Real PV
Cumulative real PV
NPV

(400,000) 100,000 200,000


100%
95%
91%
(400,000)
95,238 181,406
100%
94%
88%
(400,000)
89,286 159,439
(400,000) (310,714) (151,276)
62,259

300,000
86%
259,151
82%
213,534
62,259

Page 3

Cash Flow x Const $ Factor


Real CF x Real PV Factor

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