Published On:Wednesday, 11 January 2012
Posted by Muhammad Atif Saeed
Cash Flow Return on Investment (CFROI)
Cash Flow Return on Investment (CFROI) is an internal rate of return (IRR) type metric measuring the return expected to be generated by a firm’s existing assets throughout their useful lives. CFROI can be calculated in five steps:
- compute the average life of assets by dividing gross assets by depreciation expense
- compute gross cash flow by adjusting net income for non-cash charges, financing expenses, operating lease payments and equity reserve accounts
- compute the gross investment as gross plant and equipment adjusted for reserves, capitalized expenses, restructuring charges, amortization and the present value of operating leases
- compute the value of any assets that will not depreciate (which will represent the future value)
- solve for IRR (or CFROI)
