Explain the concept of net present value (NPV) in capital budgeting.

Net present value (NPV) is a financial metric used in capital budgeting to evaluate the profitability of an investment project. It measures the difference between the present value of cash inflows and the present value of cash outflows over the project's lifespan.

To calculate NPV, the future cash flows expected from the project are discounted back to their present value using a predetermined discount rate. The discount rate represents the opportunity cost of investing in the project, taking into account the time value of money and the risk associated with the investment.

If the NPV is positive, it indicates that the project is expected to generate more cash inflows than the initial investment, resulting in a net gain. A positive NPV suggests that the project is financially viable and should be considered for investment.

On the other hand, if the NPV is negative, it implies that the project's expected cash outflows exceed the present value of its cash inflows. A negative NPV indicates that the project is not expected to generate sufficient returns to cover the initial investment and may not be economically feasible.

In capital budgeting decisions, projects with positive NPVs are generally preferred as they are expected to increase the value of the firm. However, it is important to consider other factors such as the project's risk, strategic fit, and potential impact on the company's overall financial position before making a final investment decision.