And a commonly used approximation that you'll see,

though I'll emphasize this is an approximation, is that the real rate

equals the nominal rate, minus the expected rate of inflation.

So, in our example, we might have, right,

our discount rate was 5%, and if expected inflation is 2.5%,

which is approximately what it's been over the recent history in the US,

we get a real rate of return on our investment of 2.44%.

Substantially lower.

Now, that's important, because even though the inflation is not impacting

our account balance, how much money, how many dollars we have, it is

impacting what we can do with that money, what we can buy with it.

And that's ultimately what we care about, so let's try discounting our cash

flows now by the real rate of return, RR, which we just showed was equal to 2.44%.

Right, and the discounting proceeds mechanically in the exact same way as it

was before, only now, I'm using the real rate instead of the nominal rate, okay?

And if we do a little bit of arithmetic,

we get the present values of all of these future cash flows.

We add them up, and we get a value of $376.75.

That's the present value of the sum of all of these cash flows.

Now.