What is the minimum acceptance criterion for a project based on NPV?

A project is deemed financially viable when its Net Present Value (NPV) is positive. The NPV is calculated by taking the expected cash inflows from the project, discounting them back to their present value using a required rate of return, and subtracting the initial investment. When the NPV is positive, it indicates that the project is expected to generate more cash than is required to cover its costs, including the cost of capital.

Accepting projects with a positive NPV adds value to the company, enhancing shareholder wealth. In contrast, if the NPV is zero, the project merely breaks even, meaning it does not contribute any value beyond the cost of investment; it neither hurts nor helps. A negative NPV signifies that the project is expected to generate less cash than is invested, which would detract from the value of the firm and thus should not be accepted.

This acceptance criterion is essential for financial decision-making, ensuring that the projects undertaken are those that contribute positively to the firm's financial health.