Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Three – What do we mean by ‘return’?
Exhibit 3.6: Basics of CFROI calculation
Future cash flows
A
B
Historical
investments
C
Cash flow
In this example, the company has assets with a life of three years. Investments A
are in their third year of life, B in their second and C in their first. All that we can
ascertain from the accounts about their cash generation is the total cash flow in
the current year. The insight is that if we add together the three historical annual
investments, and then relate this total to a series of three annual corporate cash
flows, then we can use this to calculate an internal rate of return for the company
as a whole. This calculation is illustrated in Exhibit 3.7.
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