Fischer's method, or angular transformation of Fischer, is a criterion of comparison of two elements interesting the researcher on occurrence frequency. The method allows to estimate reliability of differences between percentage shares of two samples where the interesting effect is registered. As a rule, it is applied in practical researches of psychologists and economists.
Instruction
1. Often situations of the competition between two certain projects, for example, interconnected And yes In meet in which NPVA> NPVB> 0, and r
In the given case it is important to define, whatprojectit is the best of all for to accept, proceeding from maximizing increase in value of the company. It is possible to receive the answer to such question simply, having calculated value of a point of Fischer.
Draw the corresponding schedule. You remember, graphically Fischer's point is a place of crossing of two NPV projects. She means that at a certain interest rate, NPV projects will be identical. Determine by the schedule indicators of both projects and their place in the drawing in relation to Fischer's point.
Make the decision on advantage of project A if the discount rate is less than percent rate when NPV projects are identical.
Make the decision on advantage of project B if the discount rate is more than percent rate when NPV projects are identical.
It is possible to make these calculations not only graphically, but also by drawing up an incremental flow of two interesting projects. For this purpose perform the following operations. Define the difference between cash flows for a certain period of one of projects and another.
Calculate IRR an incremental stream which was found by you. When IRR is more than discount rate – it is the best of all to give preference to the project with the lowest of IRR.
At the same time it is important to know that when using the NPV method (Fischer's method) for determination of efficiency of investments, the arriving money is reinvested at lower rate which will be equal for the enterprise to the price of the loan capital.
In case of use of the IRR method for definition of the indicator stated above, the company has some other opportunities of reinvestment where profitability will be equal to IRR.
As to IRR it has to be surely equal or more r, preferable selection criterion nevertheless for large projects is NPV as at this indicator the risk of short-reception of income is much less, and, therefore, than it is more often than others use as "reinsurance".
2. In the given case it is important to define what project it is the best of all to approve, proceeding from maximizing increase in value of the company. It is possible to receive the answer to such question simply, having calculated value of a point of Fischer.
3. Draw the corresponding schedule. You remember, graphically Fischer's point is a place of crossing of two NPV projects. She means that at a certain interest rate, NPV projects will be identical. Determine by the schedule indicators of both projects and their place in the drawing in relation to Fischer's point.
4. Make the decision on advantage of project A if the discount rate is less than percent rate when NPV projects are identical.
5. Make the decision on advantage of project B if the discount rate is more than percent rate when NPV projects are identical.
6. It is possible to make these calculations not only graphically, but also by drawing up an incremental flow of two interesting projects. For this purpose perform the following operations. Define the difference between cash flows for a certain period of one of projects and another.
7. Calculate IRR an incremental stream which was found by you. When IRR is more than discount rate – it is the best of all to give preference to the project with the lowest of IRR.
8. At the same time it is important to know that when using the NPV method (Fischer's method) for determination of efficiency of investments, the arriving money is reinvested at lower rate which will be equal for the enterprise to the price of the loan capital.
9. In case of use of the IRR method for definition of the indicator stated above, the company has some other opportunities of reinvestment where profitability will be equal to IRR.
10. As to IRR it has to be surely equal or more r, preferable selection criterion nevertheless for large projects is NPV as at this indicator the risk of short-reception of income is much less, and, therefore, than it is more often than others use as "reinsurance".