FREE online courses on Financial Management and Creating Value - Chapter 3 -
Some Problems with CFROI
Although CFROI is an excellent value-based metric, it does
have some shortcomings. For example, it is very difficult to calculate. You have
to identify all future cash flows associated with both present and future
investments. This is extremely difficult. Also, CFROI provides information in
the form of returns as opposed to total value created or destroyed. This may not
appeal to all managers. Finally, CFROI suffers from the reinvestment rate
problem associated with Internal Rate of Return (IRR). Therefore, given two
projects with the same Net Present Value, but different timing and amounts of
cash flows, CFROI like IRR will not show an indifference to the two projects.
You could end-up ignoring a good investment project.
