CFA Program Corporate Finance Coaching: NPV
: It takes into consideration both incoming and outgoing cash flow from a project if it is undertaken, to see how much value a project adds to the firm. That is it the sum of all the expected cash flows if a project is undertaken. The discount rate that is used in the NPV calculation is the firm's cost of capital, adjusted for the risk of the project.
We have discussed this concept here because this will be repeatedly used throughout the Level I as well as Level II. We suggest you to understand the NPV concept using the time-line (as shown in our example), it will help you to deal any kind question in the exam.