- Profitability
- Loss
- Break-even
- Liquidity
In NPV (Net Present Value) analysis, if the calculated NPV is positive, it indicates: Profitability
Here’s why:
- NPV considers the time value of money. It takes into account that a dollar today is worth more than a dollar received in the future due to potential inflation and the ability to invest that dollar and earn a return.
- A positive NPV signifies that the present value of all future cash inflows from an investment (discounted to reflect the time value of money) is greater than the initial investment. In simpler terms, the project is expected to generate more cash flow than it costs, resulting in a profit.
On the other hand:
- A negative NPV indicates that the present value of future cash inflows is less than the initial investment, suggesting a potential loss.
- Break-even analysis focuses on the point where total revenue equals total costs. NPV goes beyond that, considering the timing and value of cash flows over the entire investment period.
- Liquidity refers to the ability to easily convert assets into cash. While a positive NPV might improve a company’s financial health and potentially increase liquidity, it doesn’t directly measure it.