In capital budgeting, a project is acceptable if its net present value is:

• A. Positive (greater than zero) when discounted cash flows exceed initial investment.
• B. Negative.
• C. Zero.
• D. Equal to the initial investment.

Answer: (A)

In capital budgeting, the decision rule hinges on value creation: net present value is the present value of all future cash inflows minus the initial investment, both discounted at the cost of capital. A positive NPV means the project earns more than the company’s required return, adding value to the firm, so it’s acceptable to proceed. If NPV is negative, the project would destroy value; if NPV is zero, it just covers the cost of capital with no extra value, so the firm is indifferent. The notion of NPV equaling the initial investment isn’t the standard acceptance criterion, since NPV reflects net value added, not the size of the initial outlay itself.