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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

Dalton Ltd is assessing a division using cash flow return on investment (CFROI). Which statement best describes a key advantage of CFROI over accounting ROCE when comparing divisions with assets of different ages?

CFROI uses gross inflation-adjusted investment and gross cash flows, so it is less distorted by depreciation and historical cost. Accounting ROCE rises as assets age and book values fall, which makes divisions with older assets look better than they are.

  1. AIt uses gross, inflation-adjusted asset values and cash flows, reducing distortion from depreciation and historical costCorrect
  2. BIt eliminates the need to estimate asset lives because only current-year cash is used
  3. CIt is based on net book value, so older assets give higher returns that reflect efficiency
  4. DIt always gives a higher return than ROCE because depreciation is added to the numerator

Explanation

CFROI is an IRR-type measure using gross cash flows against inflation-adjusted gross investment over asset life, so it avoids the rising ROCE of ageing, depreciated assets. Asset life estimates are still needed, and net book value is not the base, so the other options are wrong.

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