The difference between the present discount value of a revenue stream and the present discount value of a cost stream is called the:
A) interest rate.
B) net present value.
C) net cash flow.
D) profit.

Question

Quizplus · Accepted Answer

The net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. It is used to evaluate an investment or project and determines if it is expected to generate profit or loss. The NPV takes into account the time value of money through discounting the cash flows by a required rate of return or cost of capital. When the NPV is positive, the investment is profitable, and when negative, it is unprofitable. Choice A (interest rate) is incorrect as it is a component used to calculate the NPV. Choice C (net cash flow) is incorrect as it does not consider the time value of money, and choice D (profit) is incorrect as it is the result of deducting total expenses from total revenue and does not consider the time value of money as well.

The Difference Between the Present Discount Value of a Revenue