Which project should an investor choose based on a higher net present value (NPV)?

When evaluating investment projects, net present value (NPV) is a crucial metric because it represents the difference between the present value of cash inflows and the present value of cash outflows over a project's duration. A project with a higher NPV indicates that it is expected to generate more value than it costs, making it a more attractive investment.

Choosing Project 1, which has the higher NPV, suggests that this project is expected to create more wealth for the investor compared to other options being considered. The rationale behind prioritizing a higher NPV is based on the goal of maximizing shareholder wealth. The underlying principle in NPV analysis is that projects with positive NPV are likely to create value, while those with negative NPV would detract from value.

In the context of the investment assessment, if Project 1 has a higher NPV compared to Project 2, it indicates that the projected cash flows from Project 1, discounted back to their present value, exceed those of Project 2. Therefore, the investor should favor Project 1 as it aligns with the objective of maximizing financial returns. This decision-making approach underscores the significance of NPV in investment selection, ensuring that capital is allocated to the most promising opportunities based on their expected profitability