Final answer:
If the NPV of an investment is substantial, it suggests significant profitability and is a good indicator of a strong investment potential, as it represents the excess of the present value of cash flows over the initial cost.
Step-by-step explanation:
When the Net Present Value (NPV) of an investment is "substantial," it indicates that the present value of the investment's future cash flows is significantly higher than its initial cost.
This implies that the investment is likely to be highly profitable and is generally seen as a strong indicator to proceed with the project.
A substantial NPV suggests that an investment will add value to the company and thus is expected to contribute positively to the company's wealth.
To calculate NPV, one must discount all the future cash flows back to their present value using a discount rate that reflects the risk of the cash flows.
The formula for NPV is: NPV = ∑ (Cash Flows in period t / (1 + discount rate)^t) - Initial Investment. Here, 't' represents each time period for which there are cash flows.