Bordios, Trichea R.

BSMA-4
BA 428
FS 3:00 – 4:30pm

CRITERIA FOR EVALUATION MODEL: CASH FLOW RETURN ON INVESTMENT

(CFROI)

 How CFROI is directly related to the resources of a company?

CFOI (cash flow return on investment) is a valuation indicator that considers
cash flow in relation to a company's cost of capital. Furthermore, CFROI believes
that stock prices are determined by financial markets based on a company's cash
flow rather than profitability or other factors. It is intimately tied to the firm's
resources since CFROI provides investors with insight into how a company works
internally, how it generates cash, finances its operations, and spends its money.

 Based on the discussion (or your additional research) about this evaluation
model, what are the advantages you have noted of using it to evaluate the
strategy of a company? How about disadvantages?
This assessment technique has the benefit of linking performance
measurement to the component that capital markets value the most: a company's
capacity to create cash flow. CFROI is also inflation-adjusted. CFROI may be
computed at the divisional (Strategic Business Unit) level and is also applicable to
privately held businesses. Reducing the rate at which the CFROI declines toward
the real cost of capital, on the other hand, Business in everyday existence. The
biggest disadvantage of this approach is the difficulty in estimating cash flows due to
the intricacy of the computations.

 On your own understanding, do you find CFROI an effective tool on identifying

the company's progress on its implemented strategy? How so?
Yes, in my personal view, CFROI is one of the most useful strategic
management tools. In this case, comparing firm performance with peers who may
have various financing options is beneficial. The emphasis on cash generating
capabilities, the fundamental underlying foundation of business value, allows for
universal comparisons with peers, regardless of whether they are headquartered in
the same nation or use the same accounting standards.
 A company must meet two test before we can say it has competitive
advantage, share your insights of these two test:
a. The company must earn, or promise to earn, a return in excess of the cost of
capital.

b. The company must earn a higher return that its peers.

For me as I look at it, it is very accurate that these two must meet or
achieve because as a stockholder you have to invest on the company that must
earn or promise to earn and return in excess of the cost of capital in order the
company that is very effective in terms on cash flow. Also the company must
earn a higher return that its peers because the higher you take the risk the higher
must you earn back on you investing and from this you will say that this company
is can have a higher risk tolerance and can survive and terms of dynamic
changes in environment as a result we can say it has competitive advantage.