What does it mean when NPV=0? Is it attractive and why?Thanks!

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New answer on Apr 30, 2020
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Anonymous A asked on Apr 01, 2020

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Giulia
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replied on Apr 01, 2020
McKinsey Business Analyst | 3+ years Experience | MBA at LBS

Hi,

it means that the profit expected (revenues - costs - initial investments) in the future from a project is zero. Thus the project is not particularly attractive itself (at least from a financial point of view).

you have to understand if you can have synergies or intangible benefits (e.g., image, brand awareness, ...) to decide whether the project is attractive.

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Vlad
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replied on Apr 01, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

When NPV =0 - that means that all your cash slows are likely 0 and there is no expectation of further growth at all. So that is not a good investment. Moreover - if we assume that the investment was made and it is amortizing overtime - having 0 NPV means that your profits will decline in the future. I can hardly imagine this case in real life

Best

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Udayan
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replied on Apr 02, 2020
Top rated MBB coach with many offers /Ex McKinsey EM in New York /6 years McKinsey recruiting experience/Real cases

It means the Net Present Value (expected earnings using cash flows) is 0. Ideally, you always want a positive NPV number as that means whatever investment project you are undertaking will give you positive returns in the long run.

In short, NPV of 0 is better than a negative NPV but worse than a positive NPV

Hope that helps,

Udayan

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Clara
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replied on Apr 03, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

In easy words, means that you will have the same amount of money as revenue than the one you will spend as cost. Hence, no losing money, but no making money either

It is only good in terms of that you don´t loose, and it allows you to have the company running, maybe penetrating new markets, etc. (e.g., some market entry exercises that are strategic can be very good with an NPV = 0)

Usually, you would look for positive NPVs to ensure profitability

Hope it helps!

Cheers,

Clara

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Francesco
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replied on Apr 02, 2020
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Hi there,

having a Net Present Value equal to zero means that the sum of the expected cash flow of the project is zero. This means that the project won’t produce any positive cash flow once accounted for the initial investment. From a financial point of view thus it doesn’t look an attractive investment, unless you clarified the objective of the client is to do the project with zero or positive NPV.

Best,

Francesco

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Anonymous B on Apr 02, 2020
Ciao Francesco, I have seen this question and I have a similar doubt, I am kindly asking you for help to let me determine if I gave a correct answer or not :) . This is the scenario: a) I am investing 100M€ today and I am expecting a perpetual rent - 10M in Cash Flow each year; b) My 'r' is 0.1; c) I am using own capital, no debt; d) from a and b, I can see that my NPV is 0. I was asked this question: "how would you consider this investment?" My answer was: "this is an average investment, where I get an yearly return of 10% - in line with the opportunity cost". Is this wrong? Should I have said "you'd better put your money in a bank to get the same 10% return"? Thank you very much, appreciating your effort in the community
Francesco on Apr 02, 2020
Hi there, would you get back the initial €100M at the end? If not, the investment would not be good, as any other option with an interest and the capital returned (eg putting the money in the bank for any interest higher than 0%) could give better results - you would get a lower interest but the capital back at the end of the investment period, thus a positive NPV. Best
Daniel
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replied on Apr 02, 2020
McKinsey / ex-Interviewer at McKinsey / I will coach you to rock those interviews

Hi! this means your cash flows in the future = 0, so it's not an attractive investment.

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Luca
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replied on Apr 03, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello,

NPV=0 means that the total value of the profits coming from your investment is equal to the total costs amount. Considering just the investment itself, it's for sure not an attractive situation.
Btw you should be careful to consider all the implications of this investment, because it could be something that enables other business opportunity.
For example, the nespresso could decide to produce and sell a new machine with a total NPV equals to 0 just to gain market share and sell more coffee capsule.

Best,
Luca

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Robert
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replied on Apr 02, 2020
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Hi Anonymous,

I mostly agree with existing answers - however in current situation a NPV of "0" can be actually a good thing, especially if you think about negative interest rates on bank account cash balances.

While with an investment project with "0" result you can e.g. prototype with new technologies, gain experience in a new area, etc. ... and still don't really pay for it since the NPV is 0. Having the same amount of cash on a bank account with negative interest rates, you have a sure loss.

Hope that helps - if so, please give it a thumbs-up with the green upvote button below!

Robert

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Antonello
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replied on Apr 30, 2020
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Giulia gave the best answer

Giulia

McKinsey Business Analyst | 3+ years Experience | MBA at LBS
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