What is the definition of "net present value" (NPV)?

Net Present Value (NPV) is an important financial metric that helps evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Specifically, it involves discounting all future cash flows back to their present value using a specific discount rate, such as the required rate of return or the cost of capital. This allows for a clear understanding of how much an investment is worth in today's terms, taking into account the time value of money.

The defining feature of NPV is that it considers both cash inflows and outflows, providing a comprehensive view of an investment’s potential by evaluating the net effect of all financial transactions associated with it. This holistic approach enables decision-makers to determine whether the expected cash inflows will exceed the anticipated costs over the project's duration, ultimately guiding investment decisions.

The other choices do not encompass the total rationale behind NPV. For example, focusing only on cash inflows does not capture the whole financial picture, leaning away from the essential aspect of considering outflows. Similarly, merely calculating the profitability at future rates overlooks the importance of bringing those values back to present terms. Additionally, summing all future cash flows ignores the crucial