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Correction Constants for Present Values of Seasonal Cash Flows
Author(s) -
Anderson Gary A.,
Barber Joel R.,
Thurston David C.
Publication year - 1997
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1997.tb01309.x
Subject(s) - cash flow , terminal value , constant (computer programming) , econometrics , value (mathematics) , cash , cash flow forecasting , mathematics , economics , computer science , statistics , finance , programming language
In a recent Decision Sciences article, McMath (1990) developed the correction constants approach for eliminating the end‐of‐year bias in the present value of streams with subannual cash flows. A limitation of this approach is that it assumes subannual cash flows are level. In many types of businesses, subannual cash flows follow a predictable seasonal pattern and, consequently, a present value estimate based upon a level correction constant is biased. This article derives a general formula for determining correction constants for seasonal cash flow patterns, examines the direction and magnitude of the seasonal bias, and applies seasonal correction constants to a capital budgeting problem.