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Fisher's Rate and Aggregate Capital Needs in Investment Decisions

Listed author(s):
  • Mária Illés


    (University of Miskolc)

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    Fisher’s rate means the interest rate where the net present values of two mutually exclusive projects become equal. The paper examines the background and the circumstances of conformation of Fisher’s rate in connection with the aggregate capital needs. Aggregate capital needs is a new conception and gives a new viewpoint to investment project decisions. The paper defines the special content of aggregate capital needs, and compiles an index number for it. The analysis widens knowledge regarding the content of net present value, and highlights the importance of taking the aggregate capital needs into consideration. Fisher’s rate only means useful information in practice if the ranking is made based on the net present value. However, this principle of ranking is in contradiction with the concept of long-term profit maximization. The transformed net present value, which is free of distorting effects (and assuming equal required rates of return,) gives the same ranking list as the internal rate of return. Therefore, Fisher’s rate has no importance in business decisions.

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    Article provided by Faculty of Economics, University of Miskolc in its journal Theory Methodology Practice (TMP).

    Volume (Year): 10 (2014)
    Issue (Month): 01 ()
    Pages: 21-32

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    Handle: RePEc:mic:tmpjrn:v:10:y:2014:i:01:p:21-32
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    1. Carlson, C. Robert & Lawrence, Michael L. & Wort, Donald H., 1974. "Clarification of the reinvestment assumption in capital analysis," Journal of Business Research, Elsevier, vol. 2(2), pages 201-208, April.
    2. Dudley, Carlton L, Jr, 1972. "A Note on Reinvestment Assumptions in Choosing Between Net Present Value and Internal Rate of Return," Journal of Finance, American Finance Association, vol. 27(4), pages 907-915, September.
    3. Meyer, Richard L, 1979. "A Note on Capital Budgeting Techniques and the Reinvestment Rate," Journal of Finance, American Finance Association, vol. 34(5), pages 1251-1254, December.
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