Posted in Finance, Accounting and Economics Terms, Total Reads: 301
Definition: Cash-on-Cash Yield
Cash on cash yield is a term that refers to the calculation of return from the asset that generates income. It is basically calculated to estimate the rate of return that an asset will be able to generate in the near future through its income.
As its name signifies, it basically estimates the amount of cash that can be returned or generated from the amount of invested cash. For Example: If the cost of a particular flat is Rs. 300000 and the income in the form of rent is Rs. 30000 annually. Then, cash on cash yield for that particular flat will be 10% annually.
However, cash on cash yield tends to overestimate the return on asset if the income generated also includes the return of invested capital instead of return on invested capital. For Example: If a person has invested Rs. 30 in a particular asset and that particular asset is able to generate an annual income of Rs 3. But it may so happen that out of this Rs. 3 generated as income, Rs. 2 may be the income on capital employed while remaining Rs. 1 may be return of already invested capital. In this case cash on cash yield will be 6.67% and not 10%.
Cash on cash yield measurement is done before all types of payable taxes on income. Hence, it is basically a measure of pre-tax return that can be generated on an asset.