The present value discounting convention errors in uniform intra-period cash flow distributions

Abstract

This study compares the estimation errors of several present value discounting conventions (end-of-year, mid-year, and the more recently proposed harmonic mean convention) for a uniform distribution of intra-period cash flow — continuous and discrete. Our results show that the mid-year convention performs best for continuous uniform cash flow streams, and that the mid-year and harmonic mean conventions produce smaller errors for discrete uniform cash flow streams than the end-of-year convention. We supply conditions for the order of preference in the case of discrete uniform cash flow distributions and provide some additional insights into the errors of the discounting conventions for both continuous and uniform intra-period cash flow distributions.