What does the net present value represent?

Net present value (NPV) is a financial metric that helps determine the value of an investment by taking into account the time value of money. This concept asserts that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

When calculating NPV, one essentially discounts the future cash flows that an investment is expected to generate back to their present value. The formula for NPV sums up the present values of all cash inflows and outflows of an investment over time and indicates whether the investment is likely to be profitable when comparing the costs and revenues.

Choosing the correct answer highlights that NPV specifically reflects how much an investment is worth today, based on its future cash flows adjusted for the time value of money. This makes it critical for investors to assess whether an investment meets their required return thresholds.