According to Norstrom’s criterion, there is only one positive rate of return value in a cash flow series when: (a) The cumulative cash flow starts out positive and changes sign only once

Question

7.     According to Norstrom’s criterion, there is only one positive rate of return value in a cash flow series when:

(a)   The cumulative cash flow starts out positive and changes sign only once

(b)   The cumulative cash flow starts out negative and changes sign only once

(c)   The cumulative cash flow total is greater than zero

(d)   The cumulative cash flow total is less than zero

Answer 1

The correct answer is :

(b )The cumulative cash flow starts out negative and changes sign only once

Norstrom’s criterion states that a cash flow series has a unique positive internal rate of return (IRR) if the cumulative cash flow starts negative (an initial investment) and then becomes positive exactly once (i.e., the cash flow changes sign only once).

This ensures there is only one positive rate of return.