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Good afternoon! I am evaluating an investment project and I want to calculate the discount rate based on a risk-adjusted method.

Calculation formula: discount rate = risk-free rate + risk adjustment + inflation.

If the project starts next month (July), then I need to use in this formula the annual inflation rate for today (at the time of assessment)? Or the inflation forecast for next year?

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  • $\begingroup$ As long as you discount nominal amounts with nominal interest rates, you don't need to adjust for inflation. Only if you discount inflation-adjusted (real) amounts would you use real interest rates (which is not what is done usually). Also, the risk free rate is set, in part, by the inflation rate, meaning that during times of high inflation you would expect the risk free rate of money to be high.In other words, nominal interest/discount rates are composed of: 1. real rate of return 2. measure of inflation. $\endgroup$
    – AKdemy
    Commented Jun 5, 2023 at 21:13
  • $\begingroup$ See for ex. should you use real or nominal discount rates cals.arizona.edu/classes/rnr485/ch4.htm. $\endgroup$
    – AKdemy
    Commented Jun 5, 2023 at 21:21

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