B is corrent. There are two capital budgeting methods which consider time value of money: internal rate of return and net present value. Under the net present value method, all cash inflows and outflows related to a capital project are discounted to a present value and netted to arrive at a net present value for the project. In order to discount the inflows and outflows, a discount rate must be determined in advance of the analysis of the project.
A is incorrect. The time-adjusted rate of return method determines the actual rate of return earned by analyzing the expected cash flows of a project. The discount rate is used after the rate of return is computed to determine the project’s acceptability (through comparison of the rates).
C is incorrect. Payback is a capital budgeting method which evaluates investments on the length of time necessary to recover the initial investment. This method does not consider the time value of money in analyzing the investment.
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