An investment appraisal technique that calculates the total discounted cash flows, minus the initial cost of an investment project; if the figure is positive, then the project is viable and should be undertaken based on financial grounds.

• A. Accounting Rate of Return
• B. Cash Flow
• C. Assets
• D. Net Present Value

Answer: (D)

Net Present Value is the measure being tested here: it adds up all the future cash inflows and outflows, discounts them back to their value today, and then subtracts the initial investment. If this total is positive, the project creates value above the cost of capital and is financially viable. The key is recognizing the time value of money—the idea that a dollar received in the future is worth less than a dollar today, so each future cash flow must be discounted appropriately. NPV uses every expected cash flow over the project’s life and a chosen discount rate to give a clear accept/reject rule: take on the project if NPV is positive, reject if negative, and be indifferent if zero. This differs from simple cash flow totals, which ignore the timing of cash, and from accounting rate of return, which uses accounting profits and still ignores the time value of money.