Final answer:
A positive NPV means the actual rate of return on an investment is greater than the required rate of return, which includes opportunity costs and potentially a risk premium.
Step-by-step explanation:
A positive net present value (NPV) indicates that the actual rate of return on a projected investment exceeds the required rate of return. This required rate of return often reflects the opportunity cost of capital and may include a risk premium for risky investments. The NPV is the result of discounting future cash flows back to their present value and comparing them to the initial investment outlay.
In real-world applications, such as when a business evaluates physical capital investments or a government considers highway safety features, the present discounted value of future benefits must exceed the present costs for the NPV to be positive, thus, validating the statement that a positive NPV implies returns greater than the required rate.If the NPV is positive, it means that the investment is expected to generate more cash inflows than outflows, resulting in a higher rate of return than the required rate of return.