Cash flow return on investment
|This article does not cite any references or sources. (October 2007)|
For the corporation, it is essentially internal rate of return (IRR). CFROI is compared to a hurdle rate to determine if investment/product is performing adequately. The hurdle rate is the total cost of capital for the corporation calculated by a mix of cost of debt financing plus investors `expected return on equity investments. The CFROI must exceed the hurdle rate to satisfy both the debt financing and the investors expected return.
Michael J. Maubossin, in his 2006 book 'MORE THAN YOU KNOW', quoted an analysis by CSFB, that, measured by CFROI, performance of companies tend to converge after five years in terms of their survival rates.
The CFROI for a firm or a division can then be written as follows:
This annuity is called the economic depreciation:
where n is the expected life of the asset and Kc is the Replacement Cost in current dollars.
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