The Origin of Present Value as a Capital Budgeting Decision Criteria: A Journey to Pisa in the Middle Ages

Abstract

The emergence of new techniques for capital budgeting decision criteria, such as real options, have not managed to displace net present value as one of the most used methodologies to evaluate the viability of an investment. This article seeks to explore the origins of present value as a technique for evaluating investment alternatives. William Goetzmann places the origin of this methodology in the Middle Ages, specifically in the first decades of the thirteenth century, in Liber abbaci, the masterpiece of Leonardo Pisano, better known as Fibonacci. The previous reassesses the belief that places this concept in Irving Fisher’s work of 1930. As to the origin of the nickname of Fibonacci, this investigation found that Pietro Cossali used and explained its meaning in his writing of 1799. This therefore, allows for reevaluating the belief that the nickname of Fibonacci was given by Guillaume Libri in 1838. Finally, this document offers a tribute to all those researchers, in this case of the history of mathematics, who because of their archaeological work rediscover advances and developments that otherwise would be forgotten.

Keywords: History of economic thought; Leonardo Pisano (Fibonacci); capital budgeting criteria (net present value); Pisa