Appendix G: Continuous discounting and annuities
The common procedure in determining the NPV is to discount end-of-year lump sum cash flows. In practice, cash flows, both positive and negative, are over shorter time frames. For example, the payment of wages could be fortnightly, while the receipts from the sale of product could be monthly. Further, interest can also be based on a continuous discounting basis rather than on an annual basis. It is therefore possible to discount on a continuous basis on the assumption that the year’s cash flow is received as a lump sum, but the interest is continuous: that is, in infinitely small increments. The new equation is:
NPV (discount rate i) = ∑CFn/ein
In practical terms it is simpler to discount on a ...
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