What is the formula for calculating NPV?

The net present value (NPV) is an important concept in finance that helps evaluate the profitability of an investment. The correct formula for calculating NPV involves summing the present values of future cash inflows from the investment and then subtracting the initial investment cost.

In the correct choice, the formula is expressed as the sum of each cash inflow divided by the discounting factor, which is (1 + r)^t, where 'r' represents the discount rate, and 't' is the time period. This calculation reflects the time value of money, which states that a dollar today is worth more than a dollar in the future due to its potential earning capacity. By summing these present values of cash inflows and then deducting the initial investment, the formula provides a comprehensive view of the net earnings from the investment adjusted for the time value of money.

This method is essential for making informed investment decisions as it allows investors to assess whether the anticipated returns justify the initial cash outlay. If the NPV is positive, it indicates that the investment is likely to generate value exceeding its cost, thus suggesting that it should be considered for acceptance.