Case with nominal cash flows and using a nominal discount rate Time period Real toll cost

($) Nominal toll cost ($) Cash flow ($) Discount factor ($) Present value ($) Net Present Value ($) 0 0.00 0.00 0.00 1.00 0.00 -3.59 1 0.98 1.00 -1.00 0.89 -0.89 2 0.96 1.00 -1.00 0.79 -0.79 3 0.94 1.00 -1.00 0.71 -0.71

Here you discount nominal cash flows with a nominal discount rate. Since the toll doesn't change w Case with real cash flows and using a real discount rate Time period Real toll cost ($) Cash flow ($) Discount factor ($) Present value ($) Net Present Value ($) Real discount rate (p) Inflation rate (i) Nominal discount rate (r) 0 0.00 0.00 1.00 0.00 -3.59 10% 2% 12% 1 0.98 -0.98 0.91 -0.89 2 0.96 -0.96 0.83 -0.79 3 0.94 -0.94 0.75 -0.71

=> =>

this is the real return (or productivity of money) this is the nominal return

NOTE THAT DISCOUNTING NOMINAL CASH FLOWS WITH A NOMINAL DISCOUNT RATE, OR REAL CA

4 0.92 1.00 -1.00 0.63 -0.63

5 0.91 1.00 -1.00 0.56 -0.56

. Since the toll doesn't change with inflation, you pocket the 2% inflation rate in addition to the real return.

4 0.92 -0.92 0.68 -0.63

5 0.91 -0.91 0.62 -0.56

eturn (or productivity of money)

AL DISCOUNT RATE, OR REAL CASH FLOWS WITH A REAL DISCOUNT RATE, GIVES YOU THE SAME NPV!

n to the real return.

HE SAME NPV!

Case with nominal cash flows and using a nominal discount rate Time period Real bed cost ($) Nominal bed cost ($) Cash flow ($) Discount factor ($) Present value ($) Net Present Value ($) 0 0.00 0.00 0.00 1.00 0.00 -5,686.18 1 1,500.00 1,530.00 -1,530.00 0.89 -1,363.64 2 1,500.00 1,560.60 -1,560.60 0.79 -1,239.67 3 1,500.00 1,591.81 -1,591.81 0.71 -1,126.97

Case with real cash flows and using a real discount rate Time period Real bed cost ($) Cash flow ($) Discount factor ($) Present value ($) Net Present Value ($) Real discount rate (p) Inflation rate (i) Nominal discount rate (r) 0 0.00 0.00 1.00 0.00 -5,686.18 10% 2% 12% 1 1,500.00 -1,500.00 0.91 -1,363.64 2 1,500.00 -1,500.00 0.83 -1,239.67 3 1,500.00 -1,500.00 0.75 -1,126.97

=> =>

this is the real return (or productivity of money) this is the nominal return

Here you discount the real cost of beds every year using a real discount rate. Because the bed cost i

NOTE THAT DISCOUNTING NOMINAL CASH FLOWS WITH A NOMINAL DISCOUNT RATE, OR REAL CA

4 1,500.00 1,623.65 -1,623.65 0.63 -1,024.52

5 1,500.00 1,656.12 -1,656.12 0.56 -931.38

4 1,500.00 -1,500.00 0.68 -1,024.52

5 1,500.00 -1,500.00 0.62 -931.38

eturn (or productivity of money)

ount rate. Because the bed cost increases with inflation, you do not pocket inflation as an additional return.

AL DISCOUNT RATE, OR REAL CASH FLOWS WITH A REAL DISCOUNT RATE, GIVES YOU THE SAME NPV!

an additional return.

HE SAME NPV!