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The Development of the Net Present Value (NPV) Rule ¨C Religious Prohibitions and Its Evolution

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  • Stefan Behringer

    (University of Applied Sciences Kollner Chaussee 11, D25337 Elmshorn, GERMANY)

Abstract

This paper describes the development of the net present value (NPV) rule. Today, net present value is a globally accepted methodology for investment appraisal in companies. Compared to other management techniques, net present value was developed and popularised comparatively late. The ban on interest, especially on compound interest, in religion and philosophy is identified as a key obstacle to its development, since compound interest is crucial for calculating NPV. German scholar Gottfried Wilhelm Leibniz¡¯s work made an important contribution to its advance in financial theory and practice. His work was adopted especially in Germany during the 18th and 19th century, but criticism and the allegation of usury was still present. One century later the instrument was advocated by engineering economics with the main representative Wellington and Grant in the early 20th century. Nevertheless, the breakthrough in practice was slow, and the rule was only established as a management tool after World War II, where practitioners like the management consultant Dean played a key role.

Suggested Citation

  • Stefan Behringer, 2016. "The Development of the Net Present Value (NPV) Rule ¨C Religious Prohibitions and Its Evolution," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 74-87, August.
    • Handle: RePEc:bap:journl:160306
    Note: Acknowledgments:
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    More about this item

    Keywords

    Investment; Net Present Value (NPV); Usury; Interest; Leibniz;
    All these keywords.

    JEL classification:

    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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