The denominator is the capital employed . So it has to be weighted appropriately to when the cash flows were received. The numerator must have no effect of cash flows at all , only the cash flow less growth of the portfolio. If you take simple examples:
where the cash flows happen at the end of the period ( like literally last day ) , and then calculate the return :
Numerator has present value , but that includes a cash flow which has not really been employed yet to generate any returns , so needs to be taken out completely.
Denominator has the capital employed with a weight for the cash flow of zero.
where the cash flows happen at the beginning of the period ( like literally beginning of first day ) , and then calculate the return :
Numerator has a previous value , but that does not includes a cash flow which has been employed fully to generate returns , so needs to be added fully to the previous value i.e. subtracted from final value completely. So the numerator is exactly the same as case 1 ( with the cash flow taken out completely )
Denominator has the capital employed with a weight for the cash flow of 1 .
I worked this out slowly to convince myself , and it worked ok .Do the same and you’ll be happy. Any interim cash flows at any point of time in the period have to be taken out completely from numerator . They do have to appear in the denominator with the right weights