Listen to a Business English Dialogue about Cash on cash return
Juan: Hi Lillian, do you know what cash on cash return means in finance?
Lillian: Yes, I do. Cash on cash return is a measure used to evaluate the profitability of an investment by comparing the annual cash flow generated to the initial amount of cash invested.
Juan: That’s correct. Cash on cash return helps investors assess the efficiency of their investment by providing a simple way to calculate the return on their capital. How do you think cash on cash return differs from other investment metrics?
Lillian: Cash on cash return focuses specifically on the cash generated by an investment relative to the initial cash investment, whereas other metrics such as ROI or IRR may take into account factors like appreciation or depreciation of assets.
Juan: Exactly. Cash on cash return provides a straightforward assessment of the income generated by an investment without considering factors like taxes or financing. How do you think investors use cash on cash return in their decision-making process?
Lillian: Investors use cash on cash return to compare the profitability of different investment opportunities, assess the risk-adjusted returns, and make informed decisions about where to allocate their capital.
Juan: That’s true. Cash on cash return helps investors prioritize investments that offer the highest potential returns relative to the amount of cash invested. How do you think cash on cash return is calculated?
Lillian: Cash on cash return is calculated by dividing the annual cash flow generated by an investment by the initial cash investment, expressed as a percentage.
Juan: Correct. The formula is simple: cash on cash return = annual cash flow / initial cash investment × 100%. How do you think investors interpret cash on cash return?
Lillian: Investors interpret cash on cash return as the percentage of cash income earned on their initial investment, providing insight into the efficiency and profitability of the investment.
Juan: That’s true. A higher cash on cash return indicates a more lucrative investment opportunity, while a lower return may signal lower profitability or higher risk. How do you think investors factor in the time value of money when considering cash on cash return?
Lillian: Investors consider the time value of money by discounting future cash flows to their present value, allowing them to compare the returns of different investments on an equal basis.
Juan: Correct. Discounting future cash flows helps investors account for the opportunity cost of tying up their capital in an investment. Thanks for the insightful conversation, Lillian.