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HOMER Pro 3.9

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Real Discount Rate

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Input Variable





The real discount rate is used to convert between one-time costs and annualized costs. HOMER calculates the annual real discount rate (also called the real interest rate or just interest rate) from the "Nominal discount rate" and "Expected inflation rate" inputs. HOMER uses the real discount rate to calculate discount factors and to calculate annualized costs from net present costs.

You can enter the nominal discount rate and the expected inflation rate in the Economic Inputs window. HOMER uses the following equation to calculate the real discount rate:






= real discount rate



= nominal discount rate (the rate at which you could borrow money)


= expected inflation rate

For example, if the nominal discount rate is 8% and the expected inflation rate is 3.5%, the annual real discount rate is 4.35%. If you want to enter the real annual interest rate directly, for example if you want to do a sensitivity analysis, you can set the expected inflation rate to zero and enter values for the real discount rate into the nominal discount rate input.

By defining the real discount rate in this way, inflation is factored out of the economic analysis. All costs therefore become real costs, meaning that they are in defined in terms of constant dollars. The assumption is that the rate of inflation is the same for all costs.

See also

Economic Inputs window

Annualized cost

Net present cost

Salvage value