What type of cash flow is considered when calculating net present value?

The calculation of net present value (NPV) requires considering both cash inflows and cash outflows because it seeks to evaluate the profitability of an investment over time. NPV is defined as the difference between the present value of cash inflows and the present value of cash outflows associated with the investment.

When assessing an investment, it is crucial to account for the initial costs (outflows) needed to undertake the project, as well as the expected revenues (inflows) generated from that investment over its life. By discounting both types of cash flows back to present value, NPV provides a comprehensive view of the net impact of all cash movements associated with the investment. This holistic approach ensures that decision-makers understand the potential return on their investment while also acknowledging the initial financial commitment required.

Other options focusing solely on inflows, outflows, or just future cash flows do not fully capture the importance of analyzing the entire cash flow stream to accurately determine the viability of a project or investment.