Use the information for the question(s) below.
-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) $780,000
B) $1,000,000
C) Cannot be determined because inadequate information is given.
D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

Question

Use the information for the question(s) below. 
-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) $780,000 
B) $1,000,000 
C) Cannot be determined because inadequate information is given. 
D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

Quizplus · Accepted Answer

D) Since the $220,000 cash flows are perpetual, the sum of the cash flows (discount rate = 0%) is infinite.

Use the Information for the Question(s) Below