The Case for Timeweighted Returns

If we accept the arguments that cash flows measure returns more accurately than earnings, and that the incremental cash flows more precisely estimate returns than total cash flows, we should logically follow up by using discounted cash flows (i.e., time-weighted returns) rather than nominal cash flows for two reasons.

1. Nominal cash flows at different points in time are not comparable, and cannot be aggregated to arrive at returns. Discounted cash flows, on the other hand, convert all cash flows on a project to today's terms and allow us to compute returns more consistently.

2. If the objective in investment analysis is to maximize the value of the business taking the investments, we should be weighting cash flows that occur early more than cash flow that occur later, because investors in the business will also do so.

Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook

Post a comment