As shown on slide 6 of chap4.ppt there are two ways to calculate the PV(NPV) using the mid-year convention; i.e. rather ...

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FIN 374C -As shown on slide 6 of chap4.ppt there are two ways to calculate the PV(NPV)

April 14, 2018

As shown on slide 6 of chap4.ppt there are two ways to calculate the PV(NPV) using the mid-year convention; i.e. rather than assume all cash flows occur at year end, we sometimes assume that all cashflows occur mid-year. Confirm that there are two ways to do this that are equivalent.

Assume the project is already up and running and produces cash flows of $50, $70 and $80 for the next three years; the cost of capital is 10%.

  1. 1.What is the PV/NPV of the three years of cash flows assuming the end of year convention, e.g. $50 at t=1, ,$70 at t=2 and $80 at t=3?
  2. 2. Using the adjustment on slide 6, what is the NPV/NPV using the mid-year convention, e.g. $50 at t= 0.5, $70 at t=1.5 and $80 at t=2.5?
  3. 3. Use discount factors, i.e. 1/(1+r)^t to confirm the answer using the adjustment on slide 6 for the NPV with mid-year cash flows.










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