What does the net present value (NPV) of an investment assess?

The net present value (NPV) of an investment assesses the current value of cash inflows and outflows associated with that investment over time. NPV is a financial metric used to evaluate the profitability of an investment, taking into account the time value of money. It calculates the difference between the present value of cash inflows (benefits) and the present value of cash outflows (costs) expected from an investment.

By discounting future cash flows back to their present value using a particular discount rate, NPV provides insight into whether an investment is likely to be worthwhile. If the NPV is positive, it indicates that the expected income from the investment exceeds the costs, making it an attractive option. If the NPV is negative, it suggests that the investment may not generate sufficient returns to justify the costs involved.

The other options do not encapsulate the core essence of NPV. Total revenue generated refers purely to income without considering the timing and costs, fixed costs focus solely on a specific category of expenses without assessing overall value, and sales growth potential speaks to future performance without an immediate financial assessment of cash flows. Therefore, the assessment provided by NPV is essential for making informed investment decisions.