## An Isoquant Approach to Investment Decision ProblemsThe given notes constitute an attempt to solve, through the use of isoquant analysis, the problem of optimal investment decisions (in business parlance, the problem of capital budgeting). The initial section reviews the principles laid down in Irving Fisher's justly famous works on interest, to see what light they shed on two competing rules of behavior currently proposed by economists to guide business investment decisions--the Present-Value Rule and the Internal-Rate-of-Return Rule. The main concern is to show how Fisher's principles must be adapted when the perfect capital market assumed by Fisher in his analysis does not exist--in particular, when the borrowing and lending rates diverge, when capital can be secured at an increasing marginal borrowing rate, and when capital is 'rationed'. Finally, an error by Fisher in his treatment of multi-period investments which has been the source of much difficulty is corrected. In doing so, support is given the contentions of those who reject the internal rate of return as an investment criterion, showing more clearly, it is believed where the error lies and how the internal rate would have to be redefined if it is to be used as a reliable guide. |

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### Contents

TwoPeriod Analysis | 3 |

MultiPeriod Analysis | 28 |

Concluding Comments | 47 |

1 other sections not shown

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aaaq aircraft alternative apply assumed audio filter borrowing and lending capital rationing commodities computing consider cost current capital funds design of experiments discount rate discussion displacements ductive equal equation error estimation theory fact Figure Fisher function game theory importance sampling indifference curve internal rate Internal-Rate-of-Return Rule investment decision investment option investor isoquant lending rate linear-programming location theory lower bound marginal borrowing rate marginal productive rate market curves market line market rate mathematical method Monte Carlo multi-period oodaaA optimal optimum parameter period players possible present value Present-Value Rule productive investment productive opportunity locus pulse qoTq QSTV rate of interest rate of return rule games sampling Scitovsky sense sequence simulation situation Stuart Dreyfus tangency techniques time-preference tion transportation two-period unbiased estimates variance zero Zone II solutions