Lute, F. A.
November 1945
Quarterly Journal of Economics;Nov45, Vol. 60 Issue 1, p56
Academic Journal
The article discusses the criterion of maximum profits in the theory of investment. To this end, the author notes that in the literature on capital and interest there is no agreement on the fundamental issue as to what an entrepreneur should maximize. The three logical possibilities, which exist, are as follows. First, it can be assumed that the entrepreneur maximizes the internal rate of return. An equation can be set up between these two streams discounted back to the present with a discount rate, which is the unknown in the equation, and then solve the equation for the discount rate. This discount rate is the internal rate of return. Secondly, it can be assumed that the entrepreneur finds the present value of the future gross revenue stream and the present value of the future cost stream by capitalizing at the interest rate ruling in the market, and maximizes the difference between these present values. Finally, it can be assumed that he maximizes the present value of the future income stream divided by the present value of the future cost stream.


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