What does an NPV that is negative typically indicate?

A negative Net Present Value (NPV) typically indicates that the project is expected to generate cash flows that are less than the cost of capital. NPV is essentially a financial metric used to assess the profitability of an investment by calculating the present value of expected future cash flows, discounted at the project’s cost of capital.

When NPV is negative, it means that when you discount the expected cash flows back to their present value and subtract the initial investment, the result is a loss. This suggests that the returns do not meet the threshold required to cover the costs associated with financing the project, leading to a conclusion that the investment is likely not worthwhile. Therefore, the project is not expected to contribute positively to the value of the firm or investor.

The other options do not accurately capture the implications of a negative NPV. For instance, a negative NPV does not guarantee that the project will fail entirely, nor does it imply that it will break even. It also does not specifically indicate that the project has high risk and gain potential; rather, it simply signals that the expected returns are insufficient when compared to the cost of capital.