What is the formula for calculating net present value (NPV)?

The net present value (NPV) formula is critical for evaluating the profitability of an investment or project. The correct choice specifies that NPV is calculated by summing the cash inflows for each period, divided by the expression (1 + discount rate) raised to the power of n, which represents each period, and then subtracting the initial investment.

This formulation incorporates the time value of money, recognizing that a dollar earned today is worth more than a dollar earned in the future. By discounting future cash inflows, the formula allows investors to make more informed decisions based on present value, rather than nominal future amounts. The term Σ indicates that this calculation is to be performed over all relevant time periods, providing a comprehensive view of the investment's value over time.

In contrast, the other options do not accurately capture the necessary components of the NPV calculation. Thus, the details in option B highlight the importance of discounting cash flows while considering the initial investment, making it the appropriate choice for calculating NPV.