Which capital investment analysis method considers the time value of money?

The internal rate of return (IRR) method is the capital investment analysis technique that takes into account the time value of money. This concept recognizes that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity. By incorporating this principle, IRR calculates the discount rate at which the net present value (NPV) of all cash flows from a particular investment becomes zero.

This makes IRR a valuable tool for decision-making, as it allows investors and managers to assess the profitability of an investment while considering how cash flows are affected over time. Unlike methods like the payback period and accounting rate of return, which do not factor in the time value of money, IRR provides a more comprehensive evaluation of an investment's potential returns. Cost-benefit analysis may also consider time elements, but it often lacks the systematic approach and specific rate of return calculation that IRR offers.