Project Management Professional (PMP) Practice Exam

Net Present Value (NPV) is a critical financial metric used in project management and investment analysis to assess the profitability of an investment. The formula for calculating NPV involves determining the difference between the present value of cash inflows and the present value of cash outflows.

The concept behind this formula is that cash flows that occur in the future are not worth the same as an equivalent amount of cash today due to the time value of money. By discounting future cash inflows back to their present value, you can accurately compare them against the cash outflows required to invest in the project. The formula effectively illustrates that NPV is the result of subtracting the discounted cash outflows from the discounted cash inflows.

To clarify the thought process: the correct choice emphasizes that you need to calculate the present value of future inflows and outflows. Cash inflows are revenues generated from the investment, and cash outflows represent costs associated with the project. To find a project's NPV, you take the total cash inflows, discount them to present value, subtract the total cash outflows (also discounted), which results in the net present value of the investment.

Using this formula allows project managers and investors to make informed decisions about which projects to undertake based