Because retail supermarket corporations operate on a low ROR, it is common to use a market MARR of about 3% per year. What real return rate is implied from a market interest rate of 3% per year when the annual inflation rate is 4% per year? Explain your answer.
What will be an ideal response?
0.03 = i + 0.04+ (i)(0.04)
1.04i = - 0.01
i = - 0.0096 (- 0.96% per year)
Minus sign shows a negative real return rate. Inflation is higher than the market MARR.
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