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    Infltn

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    nsadnan
    This document contains three sections about inflation and interest rates: 1) It defines the real interest rate as the nominal interest rate minus the inflation rate. An example shows how interest and inflation affect future cash values. 2) It demonstrates how to calculate inflation factors and constant dollar factors to adjust prices and cash flows for inflation over multiple periods. 3) It explains how net present value (NPV) can be calculated in nominal or real terms, with an example comparing the two approaches. The real NPV correctly accounts for inflation.

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    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd

    Infltn

    Uploaded by

    nsadnan
    69 views3 pages
    This document contains three sections about inflation and interest rates: 1) It defines the real interest rate as the nominal interest rate minus the inflation rate. An example shows how interest and inflation affect future cash values. 2) It demonstrates how to calculate inflation factors and constant dollar factors to adjust prices and cash flows for inflation over multiple periods. 3) It explains how net present value (NPV) can be calculated in nominal or real terms, with an example comparing the two approaches. The real NPV correctly accounts for inflation.

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    infltn

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    This document contains three sections about inflation and interest rates: 1) It defines the real interest rate as the nominal interest rate minus the inflation rate. An example shows how interest and inflation affect future cash values. 2) It demonstrates how to calculate inflation factors and constant dollar factors to adjust prices and cash flows for inflation over multiple periods. 3) It explains how net present value (NPV) can be calculated in nominal or real terms, with an example comparing the two approaches. The real NPV correctly accounts for inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    69 views3 pages

    Infltn

    Uploaded by

    nsadnan
    This document contains three sections about inflation and interest rates: 1) It defines the real interest rate as the nominal interest rate minus the inflation rate. An example shows how interest and inflation affect future cash values. 2) It demonstrates how to calculate inflation factors and constant dollar factors to adjust prices and cash flows for inflation over multiple periods. 3) It explains how net present value (NPV) can be calculated in nominal or real terms, with an example comparing the two approaches. The real NPV correctly accounts for inflation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 3

    A B C D E F G H

    1 INFLATION AND THE REAL RATE OF INTEREST


    2
    3
    4 Interest rate 12.00%
    5 Inflation rate 5.00%
    6
    7 Real interest rate 6.67% ( 1 + Interest Rate ) / ( 1 + Inflation Rate ) - 1
    8
    9
    10 EXAMPLE
    11
    12 Cash today 100.00
    13 Plus interest 12.00
    14 Cash next year 112.00
    15
    16 Price today 106.67
    17 Plus inflation 5.33
    18 Price next year 112.00

    Page 1
    A B C D E F G
    1 INFLATION AND CONSTANT DOLLAR FACTORS
    2
    3 Current price 200.00
    4 Inflation rate 5.00%
    5
    6 Year 0 1 2 3
    7
    8 Price 200.00 210.00 220.50 231.53
    9 Inflation factor 100.00% 105.00% 110.25% 115.76%
    10
    11 Inflation Factor = Previous Inflation Factor x ( 1 + Inflation Rate )
    12
    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
    16
    17 Constant dollar factor = 1 / Inflation Factor
    18
    19 Constant dollar factor = Previous Constant Dollar Factor / ( 1 + Inflation Rate )

    Page 2
    A B C D E F G H I
    1 NPV CAN BE CALCULATED IN NOMINAL OR REAL TERMS
    2
    3 Interest rate 12.00%
    4 Inflation rate 5.00%
    5 Real interest rate 6.67%
    6
    7 Year 0 1 2 3
    8
    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
    14
    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

    Page 3

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