What is meant by the term 'Net Present Value'?
A) The future value of cash flows after netting out the initial cash flow.
B) The gross sum of the final cash flow and the present value of future cash flows.
C) The present value of future cash flows after netting out the initial cash flow.
D) The gross sum of the initial cash flow and the future value of future cash flows.

Question

Quizplus · Accepted Answer

Net Present Value (NPV) is the present value of future cash flows after netting out the initial cash flow. This calculation is used in capital budgeting to determine the profitability of an investment by comparing the present value of expected cash inflows to the initial cost of the investment. A positive NPV indicates that the investment is expected to generate more cash inflows than outflows, while a negative NPV indicates the opposite. Therefore, in order to maximize shareholder value, firms should invest in projects with a positive NPV.

What Is Meant by the Term 'Net Present Value