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Investment appraisal – Further aspects of discounted cash flows

Question 2

Real and money rates

If an investment pays interest of 5.5% and the general rate of inflation is 3%,
what is the real return on the investment?

(1 + i) = (1 + r)(1 + h)

i = 0.055, h = 0.03

1.055 = (1 + r) × 1.03

1 + r = 1.055/1.03 = 1.024

r = 0.024 or 2.4%

Illustrations and further practice

Now work through the illustration and try TYU questions 1 and 2 from Chapter 4

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