In problems calculating the future value of money with both an interest rate and an inflation rate, how can the two rates be combined?
$$FV = PV \cdot (1 + r)^N$$
where
- $FV$ is the future value
- $PV$ is the present value
- $r$ is the interest rate (combined with inflation?)
- $N$ is the number of periods
Best Answer
If the inflation rate, $I$, is constant then you can model the future value in equivalent present day (real) dollars, $E$, as $$E=FV/(1+I)^N=PV\cdot\left(\frac{1+R}{1+I}\right)^N.$$