Final answer:
NPV is a financial metric that considers the time value of money and accounts for risk by discounting future cash flows. It appropriately incorporates both risk and TVM. Option A
Step-by-step explanation:
NPV (Net Present Value) is a financial metric that helps determine the profitability of an investment by considering the time value of money (TVM) and accounting for risk. It takes into account the cash inflows and outflows associated with the investment, discounts them to their present value using an appropriate discount rate, and then subtracts the initial cost of the investment.
The NPV formula explicitly incorporates the TVM concept by discounting future cash flows back to their present value. This ensures that the value of money is compensated for over time.
Furthermore, NPV also indirectly accounts for risk. The discount rate used in the calculation represents the required rate of return or cost of capital. It reflects the risk associated with the investment, with higher discount rates reflecting higher risk. By discounting the cash flows at an appropriate rate, NPV implicitly incorporates the risk factor.
In conclusion, NPV appropriately accounts for both risk and TVM, making option A the correct answer.