Non Discounted Methods:
Two popular methods that do not consider the time value of money are the payback period and the average accounting rate of return.
As per the payback period, the shorter the time to recoup the original investment, the better is the project. In this contract, the time to recoup the original investment is 2 years and hence it seems to be acceptable. The biggest advantage of this method is that it is simple to calculate and is not time consuming compared to discounted techniques. It can be a good method to screen several projects on an approximate basis. However, its biggest drawback is that it does not consider the time value of money. As such, there may be case which may seem acceptable as per the payback period but if the present value of the cash flows are considered, it is not acceptable.
Another method is the average accounting rate of return which computes the average accounting return as the average net profits earned over the initial investment. The advantage is the same like the simplicity and ease of computation but its biggest drawback is that it does not consider the time value of money and can lead misguiding results.
Both these methods can be used in initial screening of the projects but cannot be used as a final tool for evaluation.