The net present value of a project is the:
A) sum of the project's cash flow from each year.
B) project's total cash flow divided by the current interest rate.
C) sum of the present value of the project's cash flow from each year.
D) project's total cash flow, less its start-up costs.

Question

Quizplus · Accepted Answer

Net present value (NPV) is the sum of the present values of a project's cash inflows and outflows, discounted by a rate that represents the time value of money. Therefore, option C - sum of the present value of the project's cash flow from each year - is the correct choice. Option A is incorrect because it does not take into account the value of money over time. Option B is incorrect because it suggests that dividing the total cash flow by the current interest rate will give the NPV, when in fact the interest rate is used to discount the cash flows. Option D is incorrect because it does not account for the time value of money or the fact that the project may have ongoing costs beyond start-up.

The Net Present Value of a Project Is The