Project Evaluation with NPV in Capital Budgeting

Medium Capital Budgeting Project Analysis

A company is assessing a new project that involves the purchase of machinery costing $300,000, which is expected to generate cash inflows of $80,000 annually for five years. The project has an estimated salvage value of $50,000 at the end of its useful life. The company has a cost of capital of 10%. To determine whether to proceed with the project, the management decides to calculate its Net Present Value (NPV).

What is the correct interpretation of the NPV result if the calculated NPV is $25,000?

The project is acceptable as it is expected to create value for the company.

The project should be rejected because the NPV is positive.

The project is acceptable only if the internal rate of return is greater than 10%.

Hint

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