Final answer:
The difference between present value and net present value is the initial cash outlay. Net present value takes the present value of future cash flows and subtracts the amount of the initial investment to assess the viability of investment opportunities.
Step-by-step explanation:
The difference between present value (PV) and net present value (NPV) is typically the initial cash outlay. PV is the current value of a future stream of cash flows given a specific discount rate, while NPV incorporates the initial investment by subtracting the present value of cash outflows (initial investment) from the present value of cash inflows. Therefore, when analyzing any capital investment, the PV of expected profits or future cash flows is critical, but the NPV provides a comprehensive view by including the cost of the investment itself.
For instance, a firm considering a new project will calculate the NPV by estimating the PV of future cash flows the project is expected to generate and then subtracting the amount of initial capital that needs to be invested to start the project. This approach is vital in determining whether a project will yield a positive return after accounting for the cost of capital invested.