Question

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At what dollar value should the NPV profile cross the vertical axis?A) $1,000,000B) $780,000C) Cannot be determined because inadequate information is given.D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity

Answer 1

correct option is D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity

Step-by-step explanation:

given data

hair salon spends = $1,000,000

increase cash flow = $220,000 per year

to find out

what dollar value should the NPV profile cross the vertical axis

solution

we know that discount rate is = 0 %

as sum of cash flow is infinite

because cash flow = $220000

cash flow is here perpetual

so we can say that correct option is D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity