The present value of an investment's cash inflows (benefits) minus the present value of its cash outflow (costs) is known as:

Question

Accepted Answer

The correct option is 1:
Net Present Value (NPV) is the definitive term in capital budgeting that exactly matches the description provided. NPV is a superior project evaluation technique because it adheres to the time value of money principle, which dictates that a rupee today is worth more than a rupee tomorrow. The calculation involves discounting all future expected cash inflows (the project's benefits) back to the present using the firm's cost of capital (or a target rate of return) and then subtracting the present value of all cash outflows (the project's costs). The resulting net figure represents the value added to the firm by undertaking the project. An investment is considered acceptable only if its Net Present Value is positive, indicating that the project is expected to recover its cost and generate a return exceeding the required rate.

The incorrect option is 2:
Net Future Value (NFV) is conceptually similar to NPV but calculates the value of all cash flows, both inflows and outflows, at a designated point in the *future*, usually the terminal date of the investment. Unlike NPV, which discounts cash flows back to time zero, NFV compounds all cash flows forward. While a project with a positive NFV will also have a positive NPV, NFV is not the standard metric for comparing the current value of the investment's streams.

The incorrect option is 3:
Gross Present Value (GPV) is not a widely used standard term in isolation. However, in this context, it generally refers only to the *Present Value of Cash Inflows* (the benefits). It is the total discounted value of the cash benefits before the initial investment cost or the present value of all cash outflows is subtracted. Since the question asks for the difference, or the *net* result, GPV is an incomplete measure for the described concept.

The incorrect option is 4:
Gross Future Value (GFV) is not a formally recognized metric in standard financial theory or capital budgeting. Conceptually, it would represent the future value of a project's cash inflows without accounting for the outflows, making it an entirely inappropriate measure for assessing the profitability or current net worth of an investment.