Normal Cash Flow

Normal cash flow is the cash flow stream that comprises of initial investment outlay and then positive net cash flow throughout the project life. It is also called conventional cash flow stream.

In normal cash flow stream, cash flows change direction only once. The nature of the cash flow pattern is important in capital budgeting. Because when the cash flows stream is non-normal, multiple-IRR problem arises.

Example

Following table shows cash flow pattern of Alpha and Beta:

USD in million
YearAlphaBeta
0-900-2000
1200500
2200-800
32501500
4300800
5150500

Alpha has normal cash flow stream because it changes direction only once (in Year 1).

Beta has non-normal cash flow stream because it changes direction thrice (in Year 1, 2 and 3).

Written by Obaidullah Jan, ACA, CFA and last modified on

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