What is "net present value" (NPV)?

Net Present Value (NPV) is defined as the difference between the present value of cash inflows and outflows over a period of time. This concept is fundamental in finance, particularly in capital budgeting and investment analysis, as it helps determine the profitability of a project.

When calculating NPV, future cash flows are first estimated based on projected revenues and costs. These future cash flows are then discounted back to their present value using a specific discount rate, which typically reflects the risk of the investment and the opportunity cost of capital. The present values of all cash inflows are summed and compared against the present values of cash outflows, which include initial investments and any future expenses. The resulting figure is the NPV, which provides insight into the value created or lost by undertaking the investment.

A positive NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs, suggesting that the investment would add value and is financially viable. Conversely, a negative NPV would suggest that the costs surpass the expected earnings, which typically signals that the investment should be avoided.

In summary, NPV is a critical measure that aids investors and firms in evaluating the financial viability of projects by comparing inflows and outflows in today's money, making option B the