Managing a Firm's Cash Flow Recovery Strategy

Aditya Vikram Rajkumar and Jeffrey Williams
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Aditya Vikram Rajkumar: Carnegie Mellon University, USA
Jeffrey Williams: Carnegie Mellon University, USA

International Journal of Strategic Decision Sciences (IJSDS), 2012, vol. 3, issue 1, 60-80

Abstract: Traditional cash flow estimation techniques focus on generating net cash flow estimates period-by-period, which are then discounted by the firm’s cost of capital. While conceptually strong, this aggregation approach can be insensitive to the fine-grained detail so important to managing project cash flows, in particular, that investment returns are always a combination of growth (renewal) and decline (convergence) forces at work over the firm's life. As is demonstrated in this paper, the aggregation problem can be addressed by employing a cash flow recovery period (CFRP) framework, which distinguishes and quantifies the renewal and convergence forces unique to each firm's project cash flows. The benefit of this more fine-grained approach is that it provides an additional level of detail that can be used to manage firm returns.

Date: 2012
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