What happens if the present value of cash flows is less than the acquisition cost?

When assessing an investment, if the present value of cash flows is less than the acquisition cost, it indicates that the future income generated by the investment is not sufficient to recoup the initial investment and provide the expected returns. Therefore, the investor will earn less than their required rate of return, which is the minimum return they need to justify the investment risk.

This situation reflects a discrepancy between the cost of the investment and its expected financial performance. In financial terms, if the present value of the anticipated cash inflows is lower than the cost to acquire that investment, it suggests that the investment will not yield the profit necessary to meet or exceed the required return threshold established by the investor. This outcome often leads to re-evaluating the viability of the investment or seeking alternatives that might offer a better return on capital.