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This is one of two assumption of discounting factor until examiner specifies.
“All cash flows occur at the start or end of a year.
Although in practice many cash flows accrue throughout the year, for discounting purposes they are all treated as occurring at the start or end of a year. Note that if today (T0) is 01/01/20X0, then 01/01/20X2 is (T1).”Can you explain this assumption? And what is drawback if we do not assume this.
We only discount for whole years which is why we assume that cash flows are either at the start or end of the year.
For example, if a business makes sales of $50,000 a year then they are likely to be receiving the cash evenly throughout the year. Rather than try and discount day by day we treat it as though the whole 50,000 is received at the end of the year and so discount it all for a year.
There is not really a drawback. If the NPV is positive using this assumption then given that cash in reality will be received sooner than the end of the year (rather than later) it makes it even more certain that the investment will be worthwhile.
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