Note: In order to use the spreadsheet examples, you need to download Business Functions
|CorrectionM (DisAER, PmtsPerYear)|
|Correction Factor to multiply an NPV for annually spaced cashflows to convert to cashflows spaced over the year|
|Corrects NPVs calculated on an annual basis to various payment frequencies|
A bit of history may help explain this function. We developed CorrectionM when we noticed that people were analysing real estate leases using Excel"s NPV function. NPV assumes cash flows are annually in arrears whereas property leases are quarterly in advance. What people were doing was doing an annual cashflow of property income and using NPV to discount. The error between annually in arrear and quarterly in advance depends on the discount rate, but the NPV can be 7 or 8% less if you use NPV - quite significant.
Whats good or unique about it
You can use this function WITH Excel"s NPV if you realise after the fact that the cash flows you modelled did not, in fact, occur annually in arrear and you want to make specific adjustment.
The following equation is derived from annuity formulae: