In the context of net present value (NPV), what does a negative NPV indicate?

A negative net present value (NPV) indicates that the present value of cash inflows generated by an investment is less than the present value of cash outflows. Essentially, this means that the investment is not generating enough return to meet the investor's required rate of return. Investors typically set a benchmark or hurdle rate that represents the minimum return they expect from an investment. When the NPV is negative, it signifies that the investment will fail to meet this benchmark, leading to insufficient compensation for the risk undertaken. This is why a negative NPV strongly suggests that the investor does not achieve their required rate of return, making it a critical indicator in investment decision-making.

In contrast, a positive NPV suggests the investment will exceed the required return, while a NPV of zero indicates the investment is exactly meeting the required rate of return. Therefore, the option correctly reflects the implications of a negative NPV in financial analysis.