Interpretation of an NPV Analysis

An NPV analysis is interpreted as follows:

When a project has ⇒ a positive NPV ⇒ it will be profitable because it will earn more than it will cost the company. Shareholder wealth will increase. The project is acceptable.

When a project has ⇒  a zero NPV ⇒ the present value of its expected future cash inflows is exactly equal to the present value of the expected cash outflows. Shareholder wealth would neither increase nor decrease. A project with a zero NPV is questionable at best. Technically, the company would not lose money on it, but a zero NPV does not provide any motivation to embark upon the project. Furthermore, the project would have no margin of safety. If the expected cash inflows were not achieved, the project could quickly become unprofitable.

When a project has ⇒ a negative NPV ⇒ the project would be unprofitable because it would cost the
company more than it could earn. Shareholder wealth would decrease. The project is not acceptable.