How to discount monthly in advance cashflows in excel?
Does anybody have advice on how to discount monthly in advance cashflows in Excel?
Pure mid-year discounting (0.5 for year 1, 1.5 for year 2, 2.5 for year 3 etc.) does not incorporate the in advance nature of the cash flows, for which essentially the first month is simply not discounted, the second month is discounted with 1, the third month with 2 etc.
Does anybody have the formula to calculate the mid-year in advance discount factor in Excel? Many thanks.
Why would it change just because they are in advance? Shouldn’t they be discounted by the date they are paid? Am I missing something
If cash flows are monthly in advance, less is discounted over the entire year since because the first cash flow is not discounted in the DCF (because it is not in the future). The second month is then discounted with one month (since the CF is in advance is essentially is only one month in the future), the third month discounted with two months etc. etc.
I was looking for an overall discount factor which I could apply to an annual cash flow, which would reflect the monthly and in advance nature of the CFs. Mere mid-year discounting (so 0.5, 1.5 etc.) reflects in arrears discounting, which still is for like 98% correct but it still over-discounts a little.
Not having an overall annual discount factor would mean I would have to calculate the PVs monthly.
Yeah just add a row to your monthly CF array to calculate the PV for the month then sumif based on dates to roll it up as needed.
Are you talking about pre-development / pre-closing costs ? The way I look at is that I want a return on any cash at risk of uncertainty before the deal closes. The carry charge needs to be more than the discount rate I'd expect for the project. I would add on a 'carry premium' of that annual % return to get reimbursed at closing for my risk. There's no industry norm. I'd absolutely want to get a bit more than the pref I'd offer to investors fronting cash before they take any legal commitment.
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