1 + m =(1 + r) x (1 + i)
Where：
m = money rate
r = real rate
i = inflation rate
From the above formula it is possible to calculate m， r and i if you were given information about two of the three variables. For example if you were told that the money rate was 20% and real rate was 12% the inflation rate will be calculated as follows：
i =1 + m ? 1
1 + r
i =1 + 0.20? 1
1 + 0.12
i =1.0714?
= 7.14%
Equally m and r could be calculated as follows.
m =(1.12 x 1.0714) ? 1
(1.19999) ? 1
20%
r =1.20? 1
1.0714
12%
When the appropriate discount rate has been established the present value factors of this rate at different time periods can be obtained from the present value table or the present value factors calculated using the following formula：
11111
(1+r)(1+r)2(1+r)3(1+r)4(1+r)5?etc
Where r = discount rate.
Present value tables are only available for whole numbers， so if your r is not a whole number you will have to use the formula to calculate the required present value factors. Let us calculate for example the present value factors of 7.14% for years 1 to 5.
11111
(1.0714)(1.0714) 2(1.0714) 3(1.0714) 4(1.0714)5?etc
0.9330.8710.8130.7590.708
Having either obtained or calculated the present value factors for the relevant discount rates， these are then used to discount the future cash flows to give the net present values of the projects. It is important to understand when to use which rate. If the question gives you money cash flows， then use the money rate; if the question gives real cash flow it follows then that the real rate must be used. To confuse one with the other would give the wrong answer.
12%
When the appropriate discount rate has been established the present value factors of this rate at different time periods can be obtained from the present value table or the present value factors calculated using the following formula：
11111
(1+r)(1+r)2(1+r)3(1+r)4(1+r)5?etc
Where r = discount rate.
Present value tables are only available for whole numbers， so if your r is not a whole number you will have to use the formula to calculate the required present value factors. Let us calculate for example the present value factors of 7.14% for years 1 to 5.
11111
(1.0714)(1.0714) 2(1.0714) 3(1.0714) 4(1.0714)5?etc
0.9330.8710.8130.7590.708
Having either obtained or calculated the present value factors for the relevant discount rates， these are then used to discount the future cash flows to give the net present values of the projects. It is important to understand when to use which rate. If the question gives you money cash flows， then use the money rate; if the question gives real cash flow it follows then that the real rate must be used. To confuse one with the other would give the wrong answer.
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