One of the most common mistakes made in when calculating DCFs and seen all too often in corporate finance analyses is forgetting to properly adjust an annual percentage rate for the period in question.

For example, if your cost of capital is 12% on an annual basis, and you’re valuing a project that lasts only a quarter, then the discount rate you use in your DCF analysis shouldn’t be 12% (the most common mistake), or even 3% (e.g. 12% / 4 quarters), but 2.87%.

Likewise, if you have a loan with an annual percentage rate of 6% and want to calculate the amount you’re paying each month, your effective rate each month isn’t 0.5% but 0.486%. Effective rates take the impact of compounding into account, whereas simply dividing one rate by the number of periods ignores this factor.

The formula for changing from an annual percentage rate to a semiannual, quarterly, or monthly one is straightforward. In general, given an annual rate:

Effective rate for period = (1 + annual rate)

Effective rate for period = (1 + annual rate)

^{(1 / # of periods)}– 1
So for monthly, quarterly, and semiannual rates, the math becomes:

**Monthly rate = (1 + annual rate)**

^{(1/12)}– 1**Quarterly rate = (1 + annual rate )**

^{(1/4)}– 1**Semiannual rate = (1 + annual rate)**

^{(1/2)}– 1Now that you understand the idea, use an online calculator to convert annual percentage rates to effective rates!

***************************************************

**Look Good at Work and Become Indispensable Become an Excel Pro and Impress Your Boss**

***************************************************

## How to calculate net present value (NPV) - an introduction | Experiments in Finance

[…] I chose 5% as my discount rate in this valuation. I decided on this figure because I consider the amounts involved in running this site small and not very risky and more akin to putting the money in a savings account rather than anything else. After all, if the project fails, I quit running the site, and that’s that. The ads I run are done through pretty established companies that will pay when they’re supposed to. And I can’t very well invest the small amount I’m putting in each month nor the amounts I’m getting back in other places (like the stock market), so my opportunity cost is also minimal. Note that 5% is the annual rate, and I must change this to the appropriate periodic rate in order to calculate the NPV correctly. Using my periodic rate calculator, the monthly equivalent of 5% is around 0.407% or so. […]

## John Cutsinger

Thanks for the information. Now I need to take a performance return thats more than a year and convert it into an annualized number. I’m sure I just need to poke around a little.

## Glenn Sieja

I understand the conversion of the annual rate to a periodic effective rate.

In Excel, the directions for using the FV (Future Value) function indicate that we should take the annual rate and divide it by the period to get a periodic rate. Shoud we use the method described here instead?

Thanks

## Ricemutt

Hi Glenn,

I hate to punt on the question, but the answer is that it depends. If you’re given an APR (annual percentage rate), then you do as Excel says and divide by the period. If you’re given an APY (annual percentage yield), you’d need to take the compounding into consideration and use the periodic effective rate. (If you’re curious, I wrote an article last week on the differences between the two here).

At my last job, the corporation had a mandated discount rate of 15% per year to be used in all NPV analyses and we were instructed to use the effective periodic rate. This makes sense because in order to arrive at 15% annually, you’d have to take compounding into effect. If you didn’t, the annual discount rate would always be greater than 15%.

Hope that helps more than it confuses!

-Ricemutt

## nancy

how to convert an 8% cumulative return to a compounded return for a 3 year holding period.

## Ty

Can you provide the mathematical proof for converting an annual rate to a periodic (quarterly, monthly, etc.) rate. Thanks

## joyel rebello

i want to find out IRR of :-

Investment £100

monthly returns £10 per/month

period of 12 months or 1 year

will you please sent me the IRR of above question on my Email.

Thank you,

## William Lawrence

To convert a monthly IRR into an annualized IRR number, you use the following formula:

Annualized IRR = ((1+montly IRR)^12)-1

Do you agree?

Thanks

Bill

## Beck

Can I have an analysis of how you came to the formula?

Thanks

Beck

## Margie

Can somebody help me please, I need to calculate the effective interest rate, using compounding base on the formula below? Here are the given data:

Face value: $100,000

Period of payment: 5 yrs (annually)

Nominal rate: 12%

Net Price: $89,944

Effective interest rate: ?

Formula:

100,000(P/F,i,5)+100,000*12%(PA,i,5)

Thank you.

## lois

I am trying to learn how to calculate monthly amt to be received on a 2.36 interest rate on a figure of 100,000.00

## josh

THIS FORMULA IS INCORRECT. DO NOT TRUST IT

## baloo

WILLIAM LAWRENCE said :

To convert a monthly IRR into an annualized IRR number, you use the following formula:

Annualized IRR = ((1+montly IRR)^12)-1

Agree

But wat to do with the fornightly or weekly payments ????????

do tell me guys

## jatpapa

Can somebody please answer the question below.

ASSUMING THAT I MAKE MONTHLY PAYMENTS OF $30,000. AND HAS AN OUTSTANDING BALANCE AFTER 6 YEARS(OSB/72) OF $3,361,291,39. IF THE MARKET RATE FOR SIMILAR MORTGAGE IS j/2=12.25% and i make a down payment of $3,200.000. What would be the market value of the offer?

## john

Do you know the formula to convert a Ann/360 yield to a Semi 30/360 bond yield?

## Patrick

For NPV calculation, how do you calculate the discount rate table for 8% over a 5 year period ?

## Thom

If I am paying interest of 4% quarterly than how do I determine the rate this is on an annualized basis?? Can someone tell me the formula?

## kashifabbasrizvi

formula:

A=P(1+C)n

## Quan

to thom: your annual rate is calculated by this formula:

R(annual) = [(1+r(quarter rate))^4]-1

## YAhya

If my city has 3% of annual population growth rate what is the daily increase rate in growth and what is the monthly growth rate of the population. I f someone tell me the formula to calculate

## Deepak

Hi there, thanks for sharing some of the examples, i think you may be able to help me in my current anomaly.

Is it possible to get a single rate (something like an IRR) for a loan with floaring rates across periods, lets say on term of 5 years, 1st year 5%, second year 6% and third year 7% and 4th and 5th 8%, how can we calculate a single rate of interest of the entire term of the loan.

Please advise.

thanks

## Shane

hello can someone please help with this equasion.

A property is rented with rent collected at the end of each year. the rent for the coming year will be $23,500 to be collected in twelve mont’s time. The rent is expected to escaluate at 3% per annum.. THe property is expected to be worth $ 533043 at the end of 5 years.

What is the properties estimate of value using a discount of 13%.

With the value of the property to the nearest whole dollar.

any help appreciated . Can you use a DCF MOdel to figure this out etc.

## Royal

I appreciate you sharing this blog post.Really looking

forward to read more. Great.

## Pat

Read your equation, and wanted to find out why it worked. Took me awhile, but I was able to prove your equation using (P(1+i[1])^12n) = (P(1+i)^n) (which is pretty much the future worth of monthly compounding vs yearly compounding being equal to each other) and solving for i[1] as the monthly interest rate. Thanks a bunch for this!

## Fort Bend County Assault Law Firm Help

Clever. I agree.

## rami

can someone help me with this problem?

you arranged to borrow 3000 for home repairs. the loan will be required in 6 equal annual paymnets, with end of year payments at intest rate= 6% ( effective annual rate)

A. calculate the amount of yearly payment ( round to nearst doller)

B. after you have committ3ed to the loan payment in (a), the finance comppany informs you that there are some additional fees (transaction coast) abd these will be subtracted from the 3000 you are to recive. calculate the true intrst rate given these fees to be 180.

## hostgator 50 off

I could assume that I would have ten web pages of 2MB each.

They’ve specifically created various types of hosting plans

dependent on their individual customers’

tailor-made desires and needs. For all these reasons,

the correct decision needs to be made at the very first instant without basing everything on monthly fee.

## diy romantic valentines day ideas for him

Gift Ideas: a camera, sports equipment, puzzles (if your budget is low),

an expensive perfume, a leather belt, sexy lingerie.

A personalized mug is one of the most general gifts and best for children.

Just because there is monetary gift etiquette for college graduation and the

grads that achieve success, it doesn’t mean it’s always followed to the letter.

## Pam

What is the formula to add 350 basis points (annual) to a monthly return?

## Paolo

The conversion of yearly rate to say monthly does not work. The formula you give does not yield the results of the calculator, nor those of the the example.

## consulting non profit

com and providing free of cosat consultancy to parents

and schools for fast andd easy onlije school admissions in the pre-schools of India as per their choice.

Some of the best Information Security Specialists are

certified by CISSP (Certified in Riskk and Information Systrms Control) which is a gold standard for data protection. How wonderful it would have

been if they had hired ITIL Professionals before.

## buy acne treatments

I go to see every day a few web pages and blogs

to read articles or reviews, except this webpage offets quality based articles.

## the best spinner

It’s furthermore vital to post your own review of tackle that hhas

either been a great or a poor aaddition to your collection. Otber spinners will replace “book”

in two places assuming it is noun or verb. Content creation management services play a vital role inn getting a favorable ranking and placement oon search engines.

## La Mort aux trousses

If you have a home theatre system or a pair of loudspeakers then you

will want to get the best possible sound quality and maximum potential from

your speaker system. We guarantee your satisfaction, and we_ll make your

event special and memorable for an affordable price.

In some cases, surround sound is not possible in low frequency; however, it

is not the case with Panasonic SC-PT480EB-K.

## Anonymous

If you are looking to buy a desktop PC for your

home it is likely you will want it to perform a variety of tasks from basic things like sending

emails and word processing to more complex tasks like downloading music

and streaming video from the internet. with this special “Twiathlon” ticket, you are sure

to be one of the first to see this epic saga continue unfolding.

There are several cinema news website which update the photos and videos of the wedding.

## Anonymous

If you have a home theatre system or a pair of loudspeakers then you

will want to get the best possible sound quality and maximum

potential from your speaker system. We guarantee your satisfaction, and we_ll make

your event special and memorable for an affordable price.

Wine and beer is served on Saturdays and Sundays beginning when the Cinema opens its

doors, which is generally at 11:30 a.

## Nos pires voisins Film complet

The true filmaholic hears a song from the soundtrack and knows exactly where it comes in during

the film. But television do not provide the same pleasure

of watching a movie as does movie theatre with its huge screen and surround sound system.

9:30 pm Street Smarts: YAK Films’ Dance Then and Now

– YAK Films is an international media production team whose work with

urban dance began with the legendary Turf Feinz crew in Oakland,

CA, innovators of the Turf dancing style.

## New Mexico Mortgage

Butt at this ttime we have exhausted all of our income and resources

soo we are turning to you for help. In the US, the

HUD or US Office of Housing and Urban Development regulate the amount you can borrow through an FHA loan.

Let’s say your property is going up in worth $2,000 a month.

## league of angels cheat codes

Also, when you consider those 50,000,000 plus innocent lives

that were taken, and then you consider how many future generations were eliminated, you begin to see that the population that

was eliminated was far more than the original 50,000,000. Now there is no reason for any fantasy

lineup (except in freaky twenty team leagues) to go without at

least one backstop who can help in a category or three.

Farrah fought the odds, but succumbed to the disease June 25, 2009.

## SB Game Hacker apk

Hi to all, how is everything, I think every one is getting more

from this website, and your views are fastidious in favor of new viewers.

## windows 8

The question remains, ‘Are these phones worth the wait’.

Considering the sound, the quality is pretty impressive.

It looks like Microsoft will be planning to tie in the Sky –

Drive functionality to Windows 8.

## Tim

This should state that the beginning 12% is an APY and not an APR.

## Titan Gel

Hello, i believe that i saw you visited my web site thus i came to go back the favor?.I am attempting

to find things to improve my site!I guess its adequate to use some of your ideas!!

## pokemon poker88

I loved as much as you’ll receive carried out right here.

The sketch is tasteful, your authored material stylish. nonetheless, you command get bought an nervousness over that you wish be delivering the

following. unwell unquestionably come more formerly again since exactly the same nearly very often inside case you shield this increase.

## qqzynga

What’s up to all, it’s really a nice for me to pay a quick visit

this website, it includes valuable Information.

## 86Jayson

I see you don’t monetize your site, don’t waste your traffic, you can earn extra cash

every month because you’ve got high quality content. If you want to know

how to make extra bucks, search for: best adsense alternative Wrastain’s tools