The present value concept discounts the cash flows of a period by the entire period using the discount rate. The DCF valuation method relies on the present value concept to value the cash flows of a business. Therefore the DCF valuation method also discounts the cash flows of a period by the entire period using the discount rate. This assumption may be an appropriate reflection of reality for most companies. But not all companies. For some companies, the midyear convention is not appropriate. We this when the midyear convention is not appropriate on this page.
The midyear convention is not appropriate to use when the underlying assumption does not reflect reality. You want your model to reflect reality as far as possible.
The midyear convention assumes that cash flows occur in the middle of the year. The midyear convention is great for businesses that have cash flows that occur evenly during the year. Not all companies have cash flows that occur evenly during the year. Many companies are seasonal, and a DCF model must consider and incorporate the seasonal impact. For example, retailers generate most of their cash flows in the last quarter, so the mid-year convention may not be appropriate for retailers. The year-end assumption is maybe more suitable for a retailer.