Real/Nominal Interest/Discount Rates
Real Interest/Discount
Rates
do not
include inflation. Nominal Interest/Discount Rates
do include inflation. Inflation Rate is an increase in
price levels, expressed as an annual rate. Inflation erodes the purchasing
power of income and investments. In the U.S., inflation is usually measured
by producer price index (PPI), and consumer price index (CPI), . The PPI
measures inflation for the producer goods such as machinery. The CPI
measures inflation for the consumer goods such as food and clothes. From
1931 to 2001 in the U.S., the average annual CPI increased about
4.15%.
One should usually use
real discount
rates in timberland investment analyses or any other investment
analyses. If nominal discount rates are used, one
should also apply inflation rates to all the costs and revenues in the
analyses. Because the inflation rates are very hard to forecast, using real
discount rates simplify the analyses. If both nominal discount rates and the
corresponding inflation rates are used in an analyses, the results will be
the same to using real discount rates only.
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