Using the net present value method,managers sum the present values of all expected future cash flows from the project and ________.
A) add the initial investment
B) subtract the initial investment
C) ignore the initial investment
D) add the depreciation expense

Question

Quizplus · Accepted Answer

The net present value method involves subtracting the initial investment from the sum of the present values of future cash flows. This is because the initial investment represents an outflow of cash at the outset of the project, while the future cash flows represent inflows of cash over time. By subtracting the initial investment, managers can determine whether the project is expected to generate a positive or negative net present value, which is a key indicator of its potential profitability. Adding or ignoring the initial investment would not provide an accurate representation of the project's expected cash flows. Similarly, adding the depreciation expense would not be relevant to the net present value calculation, as depreciation is a non-cash expense that does not affect cash flows.

Using the Net Present Value Method,managers Sum the Present Values