Which formula is used to calculate the Net Present Value (NPV)?

The formula used to calculate the Net Present Value (NPV) is based on the concept of discounting future cash flows back to their present value and then subtracting the initial investment. The correct formulation, as highlighted in the answer, involves summing the present values of each future cash flow generated by an investment, which is accomplished using the formula (Cash Flow / (1 + r)^n), where (r) represents the discount rate and (n) is the time period.

By summing these discounted cash flows and then subtracting the initial investment, you arrive at the NPV, which provides insight into whether the investment is expected to generate a profit or loss. When the NPV is positive, it indicates that the projected earnings (in present value terms) exceed the costs, suggesting the investment may be worthwhile. This framework helps investors, analysts, and financial managers make better decisions regarding capital budgeting and investment opportunities.

The other options do not align with the established formula for NPV: one suggests incorrect arithmetic operations or misapplies the principles of cash flows and time value, which leads to misunderstanding the financial assessment of an investment's viability.