Jagdeep is considering a project that requires a large immediate investment and yields a return in five years. If he assumes that there will be be no inflation over the next five years, his calculated rate of return on the project is 25%. If he instead assumes a 10% annual rate of inflation, what will his expected real rate of return be?
A)It will still be 25%.
B)13.64%
C)15%
D)35%
E)37.5%

Question

Quizplus · Accepted Answer

The real rate of return, considering inflation, can be calculated using the formula: $\frac{1 + nominal\ rate}{1 + inflation\ rate} - 1$. Plugging in the given values: $\frac{1 + 0.25}{1 + 0.10} - 1 = \frac{1.25}{1.10} - 1 = 1.1364 - 1 = 0.1364$ or 13.64%.

Jagdeep Is Considering a Project That Requires a Large Immediate