A cost-benefit analysis reveals a negative net present value. What action is MOST appropriate given this finding?

The most appropriate action given a cost-benefit analysis revealing a negative net present value (NPV) is to reject the project or investment. Let's break down what this means. A cost-benefit analysis is a systematic process used to evaluate the desirability of a project or investment by comparing its expected costs with its expected benefits. It attempts to quantify all relevant costs and benefits to determine if the project is worthwhile. Costs include things like materials, labor, and any associated expenses. Benefits are the positive outcomes, often expressed as increased revenue, efficiency gains, or other value created.

'Present value' is a crucial concept here. Money received today is worth more than the same amount of money received in the future. This is due to factors like inflation and the potential to earn interest. Present value calculations discount future cash flows (both costs and benefits) back to their value in today's dollars. This discounting uses a 'discount rate,' which reflects the time value of money and the risk associated with the project. A higher discount rate means future cash flows are worth less today.

'Net present value' (NPV) is calculated by summing the present values of all expected cash flows (both positive and negative) associated with a project. If the present value of the benefits exceeds the present value of the costs, the NPV is positive, suggesting the project is likely profitable. Conversely, if the present value of the costs exceeds the present value of the benefits, the NPV is negative. A negative NPV indicates that the project is expected to lose money when considering the time value of money and the associated risk. It means the project's expected returns are less than the required rate of return (the discount rate).

Therefore, a negative NPV signals that the project is not financially viable and should not proceed. While there might be non-financial reasons to pursue a project (e.g., social good, strategic importance), from a purely economic perspective, rejecting a project with a negative NPV is the most prudent course of action. It’s possible to re-evaluate the project by adjusting assumptions (e.g., increasing benefit estimates, decreasing cost estimates, or lowering the discount rate), but a fundamentally negative NPV suggests significant issues that need to be addressed before reconsideration.