NPV is defined as what difference?

NPV is defined as what difference?

• A. The difference between undiscounted inflows and the initial outlay.
• B. The sum of discounted inflows.
• C. The difference between the discounted inflows and the initial investment.
• D. The time required to break even.

Answer: (C)

Net present value shows how much value an investment adds after accounting for the time value of money by discounting future inflows to their present value and then subtracting the initial amount invested. So the NPV is the present value of the inflows minus the initial investment. This reflects both how much cash the project is worth today and how much money you had to spend up front. The other descriptions don’t fit because they either ignore the cost that starts the project (the inflows are discounted but the initial outlay isn’t subtracted) or focus on a different concept altogether (the payback period, which is about how long it takes to recover the initial cost and doesn’t consider the value of money over time). Also using undiscounted inflows ignores the time value of money, which is central to calculating NPV.

Net present value shows how much value an investment adds after accounting for the time value of money by discounting future inflows to their present value and then subtracting the initial amount invested. So the NPV is the present value of the inflows minus the initial investment. This reflects both how much cash the project is worth today and how much money you had to spend up front.

The other descriptions don’t fit because they either ignore the cost that starts the project (the inflows are discounted but the initial outlay isn’t subtracted) or focus on a different concept altogether (the payback period, which is about how long it takes to recover the initial cost and doesn’t consider the value of money over time). Also using undiscounted inflows ignores the time value of money, which is central to calculating NPV.