Which concept compares the present value of expected cash inflows to the initial investment?

Which concept compares the present value of expected cash inflows to the initial investment?

• A. Time Value of Money
• B. Equivalent Annual Cost or Benefit
• C. Net Present Worth
• D. Cost Escalation

Answer: (C)

The main idea here is evaluating an investment by translating future cash inflows into their value today and comparing that to the amount invested now. This uses the time value of money, recognizing that a dollar received in the future isn’t worth as much as a dollar today. The measure that captures this comparison is net present worth: you take the present value of all expected cash inflows and subtract the initial investment. If the result is positive, the investment adds value at the chosen discount rate; if negative, it does not. To place this in context, the time value of money underpins NPW, explaining why we discount future inflows. Equivalent annual cost or benefit is another technique used to compare different projects by annualized value rather than a direct present-value comparison. Cost escalation deals with how costs rise over time and isn’t about weighing inflows against the initial outlay.

The main idea here is evaluating an investment by translating future cash inflows into their value today and comparing that to the amount invested now. This uses the time value of money, recognizing that a dollar received in the future isn’t worth as much as a dollar today. The measure that captures this comparison is net present worth: you take the present value of all expected cash inflows and subtract the initial investment. If the result is positive, the investment adds value at the chosen discount rate; if negative, it does not.

To place this in context, the time value of money underpins NPW, explaining why we discount future inflows. Equivalent annual cost or benefit is another technique used to compare different projects by annualized value rather than a direct present-value comparison. Cost escalation deals with how costs rise over time and isn’t about weighing inflows against the initial outlay.