Mid-Year Discounting

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Definition: Mid-Year Discounting

In calculating Discounted Cash Flow (DCF), the formula

Present Value=Cash Flow*1/(1+r)^n  

takes the assumption that the entire cash flow comes at the end of the year. But in reality, the cash flows are distributed throughout the year. Hence in Mid-Year discounting, it is assumed that the Cash Flow comes halfway through the year. It gives a more accurate value. The formula is given by:

Present Value=Cash Flow*1/(1+r)^(n-0.5)

where r = discount rate % , n = projected number of years

Eg: Let us consider that 5 years from now there will be an estimated cash flow of $1000. The discount rate is 10%. The present value under mid-discounting approach is calculated as follows:

Present Value=1000*1/(1+10%)^(5-0.5)



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