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.

Money interest rate (m) = 3% = 0.03

Inflation rate (i) = 4% = 0.04

Real interest rate (r) ?

(1 + m) = (1 + r) (1 + i)

(1 + 0.03) = (1 + r) (1 + 0.04)

1.03 = (1 + r) (1.04)

1.03/1.04 = 1 + r

0.0004 - 1 = r

r = - 0.0096 = - 0.96%

Explanation:

In this case, we need to apply fisher's formula, where money interest rate and inflation rate have been given with the exception of real interest rate. Thus, we will make real interest rate the subject of the formula.