A B C D E F G H

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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9
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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 A B C D E F G
1 INFLATION AND CONSTANT DOLLAR FACTORS
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3 Current price 200.00
4 Inflation rate 5.00%
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6 Year 0 1 2 3
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8 Price 200.00 210.00 220.50 231.53
9 Inflation factor 100.00% 105.00% 110.25% 115.76%
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11 Inflation Factor = Previous Inflation Factor x ( 1 + Inflation Rate )
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13 Price 200.00 210.00 220.50 231.53
14 Constant dollar factor 100.00% 95.24% 90.70% 86.38%
15 Price in constant dollars 200.00 200.00 200.00 200.00
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17 Constant dollar factor = 1 / Inflation Factor
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19 Constant dollar factor = Previous Constant Dollar Factor / ( 1 + Inflation Rate )

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 A B C D E F G H I
1 NPV CAN BE CALCULATED IN NOMINAL OR REAL TERMS
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3 Interest rate 12.00%
4 Inflation rate 5.00%
5 Real interest rate 6.67%
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7 Year 0 1 2 3
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9 Cash flow (400,000) 100,000 200,000 300,000
10 PV factor 100% 89% 80% 71%
11 PV of cash flow (400,000) 89,286 159,439 213,534
12 Cumulative PV (400,000) (310,714) (151,276) 62,259
13 NPV 62,259
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15 Cash flow (400,000) 100,000 200,000 300,000
16 Constant dollar factor 100% 95% 91% 86%
17 Real cash flow (400,000) 95,238 181,406 259,151 Cash Flow x Const $ Factor
18 Real PV factor 100% 94% 88% 82%
19 Real PV (400,000) 89,286 159,439 213,534 Real CF x Real PV Factor
20 Cumulative real PV (400,000) (310,714) (151,276) 62,259
21 NPV 62,259

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