Calculate the inflation-adjusted discount rate using the Fisher Equation.
Real Discount Rate
0.00%
Please enter valid numeric values for both fields.
Understanding the Real Discount Rate
In finance and economics, the Real Discount Rate is the discount rate that has been adjusted to remove the effects of inflation. While a nominal discount rate tells you the face-value return or cost of capital, the real rate reflects the actual increase in purchasing power or the "true" cost of funds.
Why Adjust for Inflation?
Money loses value over time due to inflation. If you expect a 10% return on an investment (Nominal Rate), but prices for goods and services rise by 4% during that same period (Inflation Rate), your actual gain in wealth isn't 10%. Instead, you have gained approximately 6% in terms of what that money can actually buy. The Real Discount Rate is essential for long-term project valuation (NPV), pension fund planning, and multi-year capital budgeting.
The Fisher Equation Formula
To calculate the real discount rate accurately, we use the Fisher Equation. While a simple subtraction (Nominal – Inflation) provides a rough estimate, the precise formula used by this calculator is:
Imagine a company is evaluating a 10-year infrastructure project. They decide on a Nominal Discount Rate of 7% based on their current cost of debt and equity. However, the central bank expects a long-term Inflation Rate of 2.5%.
Step 3: Divide the nominal factor by the inflation factor. (1.07 / 1.025 = 1.043902)
Step 4: Subtract 1 and convert back to a percentage. (0.043902 * 100 = 4.39%)
In this scenario, the Real Discount Rate is 4.39%. This is the rate that should be used if the project's future cash flows are estimated in "constant" or "real" dollars (today's purchasing power).
When to Use Each Rate
Scenario
Rate to Use
Cash flows include expected price increases (Nominal Cash Flows)
Nominal Discount Rate
Cash flows are expressed in today's prices (Real Cash Flows)
Real Discount Rate
function calculateRealRate() {
var nominalInput = document.getElementById("nominalRate").value;
var inflationInput = document.getElementById("inflationRate").value;
var errorText = document.getElementById("error-text");
var resultBox = document.getElementById("calc-result-box");
var resultDisplay = document.getElementById("realRateResult");
var interpretation = document.getElementById("interpretation");
if (nominalInput === "" || inflationInput === "" || isNaN(nominalInput) || isNaN(inflationInput)) {
errorText.style.display = "block";
resultBox.style.display = "none";
return;
}
errorText.style.display = "none";
var n = parseFloat(nominalInput) / 100;
var i = parseFloat(inflationInput) / 100;
// Fisher Equation: (1 + r_real) = (1 + r_nom) / (1 + i)
// r_real = ((1 + r_nom) / (1 + i)) – 1
if (i === -1) {
resultDisplay.innerText = "Error";
interpretation.innerText = "Inflation rate cannot be -100%.";
resultBox.style.display = "block";
return;
}
var realRate = ((1 + n) / (1 + i)) – 1;
var realRatePercentage = realRate * 100;
resultDisplay.innerText = realRatePercentage.toFixed(3) + "%";
var diff = (n – i) * 100;
interpretation.innerHTML = "Using the precise Fisher Equation, your real rate is " + realRatePercentage.toFixed(3) + "%. Note that the simple approximation (Nominal – Inflation) would suggest " + diff.toFixed(2) + "%.";
resultBox.style.display = "block";
}