The Fisher rate is a tool used in the accounting and finance area so that users can select between two investment projects which one suits them best.
To do this, projects must be comparable and must be in evaluation stages. Typically used when there is a positive NPV and rate environment.
Selection criteria for Fisher's rate
To calculate and make the Fisher rate effective, we must observe the VAN and TIR:
- By definition, NPV refers to the net present value, that is, the present value of a number of future cash flows, originated by an investment.
- On the other hand, the IRR refers to the interest rate that nullifies the NPV.
If we want to select one investment project over another, we will look at the project whose NPV is higher than the cut-off rate used. On the other hand, the cut between both investment profiles must occur in the first quadrant of the graph where the NPV function is.
Calculation of the Fisher rate
In order to decide one project over another when using the Fisher rate, we must indicate that there is no exact or specific analytical formula to be able to carry out the calculation.
However, we can use the data management tool such as Excel to be able to establish an analytical and intuitive formula that allows us to know which project interests us more compared to another.
Both projects face each other, the Fisher rate being the discount rate that equals the NPV of both projects. If the valuation is lower than the established Fisher rate, that project is chosen over another.