What is the definition of Mid-Year Discount?

A mid-year discount is a term used in a DCF analysis to discount future cash flows to a present value. The basic method of discounting cash flows is to use the formula:

• Cash Flow / (1 + Discount Rate)^(Year-Current Year)

The problem with the standard method is that it discounts the future value too much. It assumes that the entire value of cash flow for a given year comes in at the very end of that year, and therefore should be discounted accordingly. This is inaccurate as the cash will be flowing in over the full year.

To account for this, a mid-year discount is used to assume that all the cash comes in halfway through the year to average it out. To do this, the following formula is used:

• Cash Flow / (1+Discount Rate)^((Year-Current Year)-0.5)