In the context of cost-benefit analysis, what does a higher risk-adjusted NPV indicate?

A higher risk-adjusted Net Present Value (NPV) is an indication that the potential returns from an investment outweigh the risks associated with it, adjusted for the time value of money and the uncertainty of future cash flows. This metric reflects a more comprehensive assessment of the investment's profitability by considering both expected returns and the risks involved.

When a project's NPV is higher after accounting for risk, it suggests that the investment is likely to generate favorable financial returns, making it a more attractive option compared to alternatives with lower risk-adjusted NPVs. This means that, from a financial perspective, it is viewed as the preferred choice, as it balances potential returns against the risks adequately.

Understanding this concept is crucial in decision-making processes, as it helps investors or stakeholders to focus not just on the projected cash flows but also on how these cash flows are affected by varying levels of risk.