Which description defines net present value (NPV) as a comparison of the discounted value of the future cash flows with the cost of setting up a project today?

Which description defines net present value (NPV) as a comparison of the discounted value of the future cash flows with the cost of setting up a project today?

• A. A comparison of future cash inflows with the project budget.
• B. The discounted value of total cash inflows.
• C. The internal rate of return for a project.
• D. A comparison of the discounted value of the future cash flows with the cost of setting up a project today.

Answer: (D)

Net present value measures whether a project adds value by bringing future cash flows back to today using a discount rate, and then subtracting the amount invested at the start. It is calculated as the present value of expected inflows minus the initial outlay; a positive NPV means value is added. The described statement is the standard definition because it explicitly references discounting the future cash flows and comparing them to today’s setup cost. The other descriptions either ignore discounting, or ignore the initial investment, or refer to a different metric entirely.

Net present value measures whether a project adds value by bringing future cash flows back to today using a discount rate, and then subtracting the amount invested at the start. It is calculated as the present value of expected inflows minus the initial outlay; a positive NPV means value is added. The described statement is the standard definition because it explicitly references discounting the future cash flows and comparing them to today’s setup cost. The other descriptions either ignore discounting, or ignore the initial investment, or refer to a different metric entirely.