Board of Governors in Healthcare Management (ACHE) Practice Exam

Having a positive net present value (NPV) signifies that the investment is projected to generate cash flows that exceed the costs when discounted back to their present value using a specific discount rate. In this context, the discount rate typically reflects the required rate of return or the opportunity cost of capital—essentially, what investors expect to earn from alternative investments with a similar risk profile.

When NPV is positive, this indicates that the present value of future cash flows is greater than the initial investment and associated costs, meaning the rate of return generated by the investment surpasses the discount rate. This is indicative of effective capital allocation, as it suggests that the investment not only covers its costs but also creates additional value for investors.

Conversely, a negative NPV would signify that the investment is expected to yield returns less than the costs when considering the time value of money. An NPV of zero implies that the investment achieves a return equal to the discount rate, signifying no additional value created. Therefore, the condition of a positive NPV confirms that the rate of return exceeds the discount rate, validating the attractiveness of the investment from a financial perspective.