Traditional approaches to justifying capital investments are of two types, discounting and nondiscounting.

a. Discounting methods take into account the time value of money.

1. The net present value method compares the net present value of expected cash inflows and outflows associated with the investment.

2. The internal rate of return method involves determining the interest rate that results in the present values of cash inflows and outflows being equal.

b. Nondiscounting methods do not consider the time value of money.

1. The payback period method involves determining the amount of time required to recover the initial investment.

2. The accounting rate of return method uses the average accounting income a project generates per period divided by the amount of the investment.