In mid-year cash flow timing, what is the discount exponent used for the first cash flow (FCF1)?

In mid-year cash flow timing, what is the discount exponent used for the first cash flow (FCF1)?

• A. 0.5
• B. 1.0
• C. 1.5
• D. 2.0

Answer: (B)

Mid-year timing means cash flows are assumed to occur halfway through each year. Because of that, the time value of the first cash flow is 0.5 years from today, so you discount it using an exponent of 0.5. In other words, the present value of the first free cash flow is FCF1 divided by (1 + r) raised to the 0.5 power. If you switch to end-of-year timing, the exponent would be 1.0; end-of-year two would be 2.0, and so on. So the first cash flow under mid-year timing uses 0.5 as the discount exponent.

Mid-year timing means cash flows are assumed to occur halfway through each year. Because of that, the time value of the first cash flow is 0.5 years from today, so you discount it using an exponent of 0.5. In other words, the present value of the first free cash flow is FCF1 divided by (1 + r) raised to the 0.5 power. If you switch to end-of-year timing, the exponent would be 1.0; end-of-year two would be 2.0, and so on. So the first cash flow under mid-year timing uses 0.5 as the discount exponent.