4.1  Real vs. Nominal Discount Rates

An important distinction is between nominal and real Discount Rates.  Nominal Discount Rates include an allowance for expected future inflation while real Discount Rates do not.  In adopting the Methodology outlined in this Guidance material the recommended preference is for a nominal Discount Rate. However, the choice between nominal and real Discount Rates is optional to practitioners but the key point to keep in mind is to be consistent in whatever approach is adopted.  For example, if real Discount Rates are used then the numerator cash flows should be set out in real terms in the Discounted Cash Flow calculation.