Levan Sabauri


The work considers essential matters of cash flow return on investments. The basic of CFROI® methodology  is the idea  of a company as the integrity of projects. Those projects have different moments and terms of development and effect as well as the various rates of payback. Subject to the goals of the analysis, they are represented as a single consolidated project which generates cash flows within the term of useful life of those assets to which the investments are aimed.

The CFROI® is based on the main idea – to determine the inflation-adjusted cash flows in favor of every capital owner and to compare them with the inflation-adjusted historical investments which have been put in the business in consideration of the depreciated cost of non-depreciable  assets according to the internal rate.

The work focuses on the detailed analysis of the CFROI® components. All components are considered separately and in connection with each other that makes the single chain determining the cash rate of return on investments. Within the analysis of cash rate of return on investments it is important to determine the duration of life cycle of strategic investments which is directly related to the establishment of the average age of the fixed depreciated tangible assets. When determining the average asset age noteworthy is by what formula it will be calculated.

Based on the practical examples the work presents the cases of “artificial rejuvenation” of depreciated assets and “artificial aging” of assets.

The work also determines the values of total investments and total cash flows, their effect on calculation of the cash rate of return on investments. Parallel with investments and cash flows there is also considered the role of IRR and MIRR for calculation of CFROI. Together with the investment model of calculation there has been applied calculation with CFROI coefficient which is based on the use of data of the economical depreciation of total investments.

Therefore, the operating cash flows are recurrent and reiterated and they create the necessary idea of the profit to be received from a business in future. CFROI® value is measured on the annual basis. It may be subject to modification. Noteworthy is to determine the internal rate of return (IRR) of a business in the current conditions. CFROI® is of analytical predictable  nature. However, it shall be applied with a particular caution.

In the final analysis, the purport of the company existence is to return all investments deposited in it and to receive the adequate revenue  which will compensate alternative expenses and bring profit to the company.

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Applied Finance and Accounting (AFA)        

ISSN 2374-2410(Print)           ISSN 2374-2429(Online)

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