29. The Orion Corp. is evaluating a proposal for a new project. It will cost $50,000 to get the undertaking started. The project will then generate cash inflows of

$20,000 in its first year and $16,000 per year in the next five years, after which it will end. Orion uses an interest rate of 15% compounded annually for such evaluations.

a. Calculate the “net present value” (NPV) of the project by treating the initial cost as a cash outflow (a negative) in the present, and adding the present value of the subsequent cash inflows as positives.

b. What is the implication of a positive NPV? (Words only.)

c. Suppose the inflows were somewhat lower, and the NPV turned out to be negative.

What would be the implication of that result? (Words only.)

(This problem is a preview of a technique called capital budgeting, which we’ll study in detail in Chapters 10, 11, and 12.)