I doubt they disposed of retired police boxes in junkyards. The episode even makes a point of the police box being out of place:
BARBARA: Ian, look at this.
IAN: It's a police box. What on earth's it doing here? They're always in the street.
As a disguise, therefore, I'd say it's pretty clearly a miss. In dramatic terms, the TARDIS needs to be conspicuous, so the chameleon circuit ends up sort of working but not really. You could retcon it as an early sign of the breakdown, I suppose.
BARBARA: Ian, look at this.
IAN: It's a police box. What on earth's it doing here? They're always in the street.
As a disguise, therefore, I'd say it's pretty clearly a miss. In dramatic terms, the TARDIS needs to be conspicuous, so the chameleon circuit ends up sort of working but not really. You could retcon it as an early sign of the breakdown, I suppose.