CORRECTION CONSTANTS FOR PRESENT VALUES OF SEASONAL CASH FLOWS

In a recent Decision Sciences article, McMath (1990) developed the cor rection constants approach for eliminating the end-of-year bias in the present value of streams with subannual cash flows. A limitation of t his approach is that it assumes subannual cash flows are level. In man y types of businesses, subannual cash flows follow a predictable seaso nal pattern and, consequently, a present value estimate based upon a l evel correction constant is biased. This article derives a general for mula for determining correction constants for seasonal cash flow patte rns, examines the direction and magnitude of the seasonal bias, and ap plies seasonal correction constants to a capital budgeting problem.