Inflation rate and discount rate?

[t0mm02]

Homework Statement

inflation and discount rate

Relevant Equations

payback

I have a payback for a project of 6 years without counting the inflation rate and discount rate. If the Payback is 6 years, how do you add an average yearly inflation rate of 2.10% and a discount rate of 5.75%?

 

[andrewkirk]

What do you want to calculate?
If you want a net present value (NPV) you multiply each cash flow by $\left(\frac{1.021}{1.0575}\right)^t$ where $t$ is the time to the cash flow. Add up those inflated and discounted cash flows to get a NPV.

One way to calculate a payback period using inflated and discounted cash flows is as the smallest T such that the sum of all inflated and discounted cash flows up to time T is non-negative.

This only gives a meaningful number if the main negative cash flows are at the beginning. If the pattern cycles between positive and negative cash flows, payback period is not a helpful measure. Internal rate of return (IRR) would be better.