An investment offers a 13 percent total return over the comi

An investment offers a 13 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent.

What does Alan believe the inflation rate will be over the next year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Solution

Let current year investment = 100

Interest = 13

Final value = 113

Real return =8%

i.e. NPV of 113 = 108

Hence npv of 1 = 108/113 = 0.955752

i.e. less valued by 0.044248

Inflation rate = 4.4248% above