Harmonic Mean as an Approximation for Discounting Intraperiod Cash Flows

György Andor and Marcell Dülk

The Engineering Economist, 2013, vol. 58, issue 1, 3-18

Abstract: We examine the possible errors of various present value approximations that center on the widely used end-of-period convention in cases of intraperiod cash flows. We suggest a new formula for adjusting the end-of-period present value based on the harmonic mean of the end-of-period and beginning-of-period present values. This approximation minimizes the maximum possible error in general. We give useful nomograms for several cash flow patterns to assess and correct for the errors of the different approximation methods. We find that the harmonic approximation has acceptable errors for most of these patterns. The findings are illustrated in a realistic example.

Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/0013791X.2012.742607 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uteexx:v:58:y:2013:i:1:p:3-18

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/UTEE20

DOI: 10.1080/0013791X.2012.742607

Access Statistics for this article

The Engineering Economist is currently edited by Sarah Ryan

More articles in The Engineering Economist from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().