What does NPV primarily measure in a financial project?

Net Present Value (NPV) primarily measures the future cash inflows of a project compared to the initial investment, adjusted for the time value of money. It provides a straightforward way to assess the potential profitability of a project by indicating how much value it is expected to generate over its lifetime. If the NPV is positive, it suggests that the project is expected to generate more cash than what was initially invested, taking the time value of money into account. This characteristic is essential because it aligns with the goal of maximizing wealth and making informed investment decisions based on projected returns.

The concept of NPV encapsulates the financial principle that money available today is worth more than the same amount in the future due to its potential earning capacity. Therefore, the plural evaluation of cash inflows against the initial outlay showcases the project's effectiveness in creating economic value. This makes it an essential measure for determining whether a project should be accepted or rejected based on its ability to contribute to shareholder wealth.