Cashflow Return on Investment

The aim of this technique is to minimise accounting distortions (depreciations, inflation, amortisations etc) in measuring a firm’s economic performance. CFROI attempts to measure the expected return on an investment using its cash flows without any adjustments and accounting for the time value of money over a specific time horizon.

Damodaran describes the techniques as the modified Internal Rate of Return for investments that have already been made.

The CFROI is calculated by taking the IRR between:

1. the gross investment which is the asset value grossed up for accumulated depreciation and the current dollar adjustment ,
2. the gross cash flows which is the cash flows without depreciation and amortisation and with adjustments for operating leases and other accounting effects;

To enhance its value into the future the firm then needs to increase the spread (or difference) between the CFROI and the WACC

1. It provides a valuation technique that concentrates on its economic performance and removes the benefits created sorely by intelligent accounting techniques;
2. It is a useful technique for measuring the 'Return on Investment' that have already been made or where there is a large depreciation wedge particularly when investments are replaced before their scheduled time horizon.