Which statement best describes Net Present Value (NPV)?

• A. NPV equals future cash flows without discounting.
• B. NPV ignores the time value of money.
• C. NPV is simply the initial investment divided by the discount rate.
• D. NPV is the sum of future cash flows discounted back to present value minus the initial investment, and is positive when acceptable.

Answer: (D)

The main concept being tested is how time value of money governs investment decisions through net present value. NPV measures how much value an investment adds by bringing all future cash inflows and outflows back to their value today using a discount rate, then subtracting the initial outlay.

In practice, NPV is the present value of future cash flows minus the initial investment. If the result is positive, the project earns more than the cost of capital and is considered acceptable because it creates value beyond what is required. If it’s zero, the project just covers the cost of capital, and if negative, it destroys value.

This statement correctly reflects that process: you discount future cash flows back to present value, subtract the initial investment, and interpret a positive result as acceptable. The other choices miss the key point: they either skip discounting, misrepresent the time value of money, or describe an incorrect calculation.