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The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will ...

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The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will ...

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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?

▸ The vertical axis crossing point cannot be calculated since the cash inflows are a perpetuity.

▸ $1,000,000

▸ Cannot be determined because inadequate information is given.

▸ $780,000

Textbook

Fundamentals of Corporate Finance

Edition: 2^nd

Authors: Berk, DeMarzo, Harford

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