Adjusting for inflation

Nominal rates are converted to real rates by applying the Fischer equation as follows:

where in = the nominal interest rate.

Real rates ir are converted to nominal rates as follows:

in = (1 + ir )(1 + ei) -1

If the real rate is 5% pa and inflation is expected to average 3% pa over the life of the project, the nominal rate is:

in = (1 + .05)(1 + .03) - 1

in ≈ 8.15 % pa