Posted in Finance, Accounting and Economics Terms, Total Reads: 1322
Definition: Conventional Cash Flow
It is a series of cash flows which changes direction only once which means that if the initial cash flow is outward it will be followed by a series of inward cash flows or vice versa. Non-conventional cash flow is the exact opposite which means that there might be more than one change in direction of cash inflows and outflows.
In terms of mathematical symbols it will be shown as -.+,+,+,+,+,+,+,+,+,+ which denotes that there is an initial cash outflow followed by cash inflows for 10 years. For example if a bank lends a home loan of Rs 50 lakh to a person for a period of 5 years and receives an amount of Rs 47000 per month for 15 years or 180 months at an interest rate of 13% then the initial cash outlay will be represented by – and subsequent cash inflows will be denoted by +.
This is generally used in Discounted Cash Flow analysis using either the NPV or IRR to evaluate projects whether they are worth investing or not. Both NPV and IRR are related to type of project which may be independent or dependent on each other. In case of independent projects both the methods yield the same results i.e. both lead to the same accept/reject decisions.
If at discount rate k1, NPV is positive and IRR comes out to be more than k1 then accept project. If at discount rate k2, NPV is negative and IRR comes out to be less than k2 then reject project.
For dependent projects sometimes NPV and IRR give conflicting results.