Mid year convention
DCFDiscounting each year's cash flow from the middle of the year rather than the end, since cash arrives throughout.
Standard discounting assumes every year's cash flow arrives on its final day, which is obviously wrong: cash comes in continuously. The mid year convention discounts each flow from the midpoint instead.
Mechanically the discount periods become 0.5, 1.5, 2.5 rather than 1, 2, 3. Because cash is treated as arriving sooner, every discount factor rises and the valuation goes up.
The effect is roughly half a year of discounting across the whole valuation, so it scales with the discount rate. At a 10% WACC it lifts value by something close to 5%, which is comfortably inside the range that decides a deal.
The terminal value needs the same treatment for consistency. Applying the convention to the explicit forecast and forgetting the terminal value is a common and material error, since the terminal value is usually the majority of the total.
Worked example
Five years of cash flow at a 10% discount rate. Year end discounting uses periods 1 through 5; the mid year convention uses 0.5 through 4.5.
A year three flow of 100 is worth 75.1 discounted at period 3, and 78.8 at period 2.5. Every year gains similarly.
Across the whole valuation the uplift is close to half a year of discounting, so roughly 5% at a 10% rate. Apply it to the terminal value too, or the largest component of the answer is left inconsistent.