What distinguishes NPV from discounted cash flows?

Net Present Value (NPV) is fundamentally a specific application of discounted cash flow (DCF) analysis used to assess the profitability of an investment by calculating the present value of cash flows generated by the investment minus the initial investment cost. What sets NPV apart is that it specifically incorporates the initial investment as part of its calculation and ultimately derives a single numerical figure indicating whether the project is expected to add value to the firm.

In contrast, discounted cash flows can refer to any method that involves discounting future cash flows to determine their present value, without necessarily factoring in the initial investment explicitly. While NPV calculates this figure, it is more comprehensive in that it ultimately considers the entire financial picture, including costs and profitability.

This integration of initial costs directly into its analysis, as highlighted in the choice, allows for a clear decision-making tool for investors—showing whether the expected returns on an investment outpace the costs incurred at the outset. It is this distinction that differentiates NPV from a more general approach to discounted cash flows, which may evaluate future inflows without explicitly connecting to the expenditures required to generate those inflows.