American Institute of Certified Public Accountants (AICPA) Practice Exam

Net present value (NPV) is a financial metric that represents the difference between the present value of cash inflows and the present value of cash outflows over a specified period of time. It is a crucial concept in capital budgeting and investment analysis, as it helps determine the profitability of an investment or project by accounting for the time value of money. By adjusting future cash flows to reflect their value in today's terms, NPV provides a clear picture of how much an investment is expected to earn or lose, allowing decision-makers to evaluate whether the investment meets their return requirements.

Choosing the option that indicates NPV reflects the relationship between cash inflows and outflows aligns with the fundamental calculation of NPV, which is simply the present value of the expected cash inflows minus the present value of the expected cash outflows. This approach helps investors and financial analysts assess the viability and financial health of potential investments.