Which investment appraisal method considers both initial costs and future cash flows?

The Internal Rate of Return (IRR) is the investment appraisal method that takes into account both the initial costs of an investment and its future cash flows. This method calculates the discount rate at which the net present value of all future cash flows from the investment equals zero, effectively allowing for a comprehensive analysis of the investment's profitability over time.

IRR is particularly valuable because it provides a single percentage figure that represents the annualized effective compounded return rate, enabling comparisons between different investment opportunities. By simultaneously considering the timing and magnitude of future cash flows along with the initial investment outlay, IRR gives a nuanced view of an investment's potential.

In contrast, methods like the Net Present Value do focus on initial costs and future cash flows, but they provide a dollar amount rather than a percentage return, which can make comparison less straightforward. The Capitalization Rate typically applies to the assessment of income-producing properties and may not provide a complete view of cash flows over time, as it's more focused on current income versus value. Cash Flow Analysis might assess the cash flows but does not inherently provide a method for evaluating the overall return on investment in a way that incorporates the time value of money, unlike IRR.