A cash flow pattern characterized by an initial negative period followed by positive entries and subsequent negative or positive sequences is categorized as__________?
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Answer: C. Non-normal cash flow
Explanation
A cash flow stream featuring alternating positive and negative cash flow signs after the initial outlay is classified as a non-normal cash flow. Unlike standard projects with a single initial outflow followed by inflows, non-normal patterns feature multiple cash reversals. These directional changes complicate traditional financial analysis, often resulting in multiple internal rates of return. Projects requiring major mid-life overhauls or environmental cleanup costs at termination often create non-normal cash streams. Standard discounted cash flow models must be applied carefully when cash flows change signs multiple times. Modified internal rate of return is frequently used to resolve mathematical anomalies caused by non-normal cash patterns.
Normal costs describe standard operating expenses rather than the comprehensive multi-period cash flow pattern. Non-normal costs is an imprecise phrase that fails to capture the multi-period cash flow sign reversal definition. Normal cash flow features a single initial cash outflow followed exclusively by positive cash inflows thereafter.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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