To calculate the NPV, which of the following do you need to subtract from the present value of cash flows?

To calculate the Net Present Value (NPV), you need to subtract the initial outlay from the present value of future cash flows. The NPV formula reflects the essence of investment evaluation: it compares the present value of the cash inflows generated by an investment to the costs incurred to make that investment.

When assessing a project using NPV, the initial outlay represents the total investment cost required upfront, which typically includes purchasing assets, paying for installation, or other initial expenditures. Once you determine the present value of all future cash flows—based on their expected inflows and considering the time value of money by applying an appropriate discount rate—you then subtract the initial investment from this sum. This calculation effectively gives you the net value that the investment is expected to generate after covering its initial costs.

Subtracting future cash flows or their present value does not make sense in the context of NPV, as that would misrepresent the calculation by confusing income with expenses. The residual value might also be relevant in capital budgeting, but it is generally not subtracted directly in the calculation of NPV; rather, it might be included in the cash flows or considered separately in terminal value assessments. Lastly, the discount rate is a factor used in calculating the present value of