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?