Decision Sciences Journal
Volume 28, Number 1
Winter 1997
Correction Constants for Present Values of Seasonal Cash Flows
Gary A. Anderson
Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199
Joel R. Barber
Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199
David C. Thurston
School of Business, Henderson State University, P.O. Box 7512, Arkadelphia, AR 71999
ABSTRACT
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.
Subject Areas: Capital Budgeting, Economic Analysis, and Resource Allocation.
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