4.1 Constant Discount Rate
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Problem. A project requires a current investment of $100.00 and yields future expected cash flows of
$21.00, $34.00, $40.00, $33.00, and $17.00 in periods 1 through 5, respectively. All figures are in
thousands of dollars. The inflation rate is 3.0%. For these expected cash flows, the appropriate Real
Discount Rate is 5.0%. What is the net present value of this project?
Solution Strategy. We begin by calculating the (nominal) discount rate from the inflation rate and the
real discount rate. The rest of the net present value calculation is the same as the Net Present Value -
Constant Discount Rate spreadsheet.
FIGURE 4.1 Spreadsheet for Real and Inflation - Constant Discount Rate.
How To Build Your Own Spreadsheet Model.
1. Start with the Net Present Value - Constant Discount Rate Spreadsheet, Insert Rows, And
Move One Item. Open the spreadsheet that you created for Net Present Value - Constant
Discount Rate and immediately save the spreadsheet under a new name using the File | Save As
command. Select the cell A5 and click on Insert | Rows. Select the range A11:A13 and click on
Insert | Rows. Select the range A6:B6, click on Edit | Cut, select the cell A12, and click on Edit
| Paste.
2. Inputs. Enter the inputs in the range B5:B6.
3. Discount Rate. The formula for the (Nominal) Discount Rate = (1 + Inflation Rate) * (1 + Real
Discount Rate) - 1. Enter =(1+B5)*(1+B6)-1 in cell B12.
The Net Present Value of this project is $15.72.
Problem. A project requires a current investment of $100.00 and yields future expected cash flows of
$21.00, $34.00, $40.00, $33.00, and $17.00 in periods 1 through 5, respectively. All figures are in
thousands of dollars. The inflation rate is 3.0%. For these expected cash flows, the appropriate Real
Discount Rate is 5.0%. What is the net present value of this project?
Solution Strategy. We begin by calculating the (nominal) discount rate from the inflation rate and the
real discount rate. The rest of the net present value calculation is the same as the Net Present Value -
Constant Discount Rate spreadsheet.
FIGURE 4.1 Spreadsheet for Real and Inflation - Constant Discount Rate.
How To Build Your Own Spreadsheet Model.
1. Start with the Net Present Value - Constant Discount Rate Spreadsheet, Insert Rows, And
Move One Item. Open the spreadsheet that you created for Net Present Value - Constant
Discount Rate and immediately save the spreadsheet under a new name using the File | Save As
command. Select the cell A5 and click on Insert | Rows. Select the range A11:A13 and click on
Insert | Rows. Select the range A6:B6, click on Edit | Cut, select the cell A12, and click on Edit
| Paste.
2. Inputs. Enter the inputs in the range B5:B6.
3. Discount Rate. The formula for the (Nominal) Discount Rate = (1 + Inflation Rate) * (1 + Real
Discount Rate) - 1. Enter =(1+B5)*(1+B6)-1 in cell B12.
The Net Present Value of this project is $15.72.