The Development of the Net Present Value (NPV) Rule – Religious Prohibitions and Its Evolution
Journal Title: Review of Economics & Finance - Year 2016, Vol 6, Issue 3
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.
Authors and Affiliations
Stefan Behringer
Keywords
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