What is the net present value (NPV) of an investment project?

The net present value (NPV) of an investment project is defined as the present value of future cash inflows generated by the project, minus the initial investment cost. This calculation takes into consideration the time value of money, which acknowledges that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

By focusing on option B, it becomes evident that NPV encapsulates the profitability and efficiency of the investment. A positive NPV indicates that the projected earnings, discounted for time, exceed the original investment, suggesting that the project is likely to add value to the business. Conversely, options that mention total cash inflows, annual profit generated, or costs incurred do not capture the essential element of discounting future cash flows to their present value, which is key to understanding the true value of an investment over time.