What is the indication when the net present value (NPV) is positive?

When the net present value (NPV) is positive, it signifies that the projected earnings generated by an investment, discounted for time and risk, exceed the initial costs. This suggests that the investment is expected to create value for the organization, contributing positively to its overall worth. A positive NPV indicates that the investment will yield a return greater than the minimum required rate of return, meaning the investment is not only worthwhile but actively adds financial value.

In financial decision-making, a positive NPV is typically associated with the likelihood of profitability, suggesting that resources will be allocated efficiently. This metric is crucial for investors and stakeholders to evaluate potential projects—focusing on maximizing the wealth of the organization. If the NPV were negative, it would imply the investment could detract from the organization’s value, leading to a reevaluation or rejection of the investment opportunity based on financial rationale.