The financial definition of net present value is the difference between the present value of future cash flows and the current cost of the initial investment.

Question

Quizplus · Accepted Answer

This statement accurately defines the financial concept of net present value (NPV), which is a key metric used in capital budgeting to evaluate the profitability of an investment by comparing the value of its expected future cash flows to the cost of the initial investment. Calculating NPV involves discounting future cash flows back to their present value using a discount rate that reflects the time value of money, and then subtracting the initial investment from the total present value. If the resulting NPV is positive, the investment is expected to be profitable, while a negative NPV suggests that the investment is unlikely to generate a satisfactory return.

The Financial Definition of Net Present Value Is the Difference