Fisher’s rate and ranking of investment projects
https://doi.org/10.21845/comp/2014/2/1
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Abstract
This paper seeks to explain the formation mechanism and economic relationships of Fisher’s rate and Fisher’s intersection. The Fisher’s rate is a discount rate at which the net present values of two investment projects are equal. This information is especially important when the ranking happens according to the net present value. However, net present value is not suitable for ranking. After removing distorting effects from the net present value method (and assuming equal required rate of return) this ranking list leads to the same ranking as the internal rate of return. Consequently, the knowledge of the Fisher’s rate in business practices is irrelevant. The Fisher’s rate and the Fisher’s intersection can only have theoretical significance. The study works out the causal relationships that are necessary for existence of the intersection. Their analyses can give a better understanding of the content background of the net present value method.
Journal of Economic Literature (JEL) code: M21
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