Final answer:
A project is considered economically feasible using the net present value (NPV) approach when the NPV is positive, meaning the present value of future cash inflows exceeds the present value of initial investment or costs.
Step-by-step explanation:
In capital budgeting, the net present value (NPV) approach is used to determine the feasibility of a project. A project is considered economically feasible when the NPV is positive. This means that the present value of the project's future cash inflows exceeds the present value of its initial investment or costs.
For example, if a project requires an initial investment of $10,000 and is expected to generate future cash inflows of $3,000 per year for 5 years, with a discount rate of 10%, we can calculate the NPV as follows:
NPV = (-$10,000) + ($3,000/(1+0.10)^1) + ($3,000/(1+0.10)^2) + ... + ($3,000/(1+0.10)^5)
If the calculated NPV is positive, then the project is considered economically feasible. However, if the NPV is negative, it indicates that the project's costs outweigh the expected benefits, making it economically infeasible.