What does 'net present value' (NPV) represent?

Net Present Value (NPV) is a critical concept in finance and investment analysis that specifically represents the present value of future cash flows generated by an investment, after subtracting the initial investment cost. This calculation allows investors and decision-makers to assess the profitability of an investment over time.

To arrive at the NPV, future cash flows are discounted back to their present value using a specific discount rate, which reflects the time value of money. By deducting the initial investment from this total present value of future cash flows, NPV indicates whether an investment is expected to generate a net gain or loss. A positive NPV suggests that the projected earnings (in present dollars) exceed the initial investment, which is a favorable signal for undertaking the investment.

Thus, the answer highlights how NPV provides a clear metric for evaluating the attractiveness of an investment by factoring in both the potential cash inflows and the initial capital outlay, leading to informed financial decisions.