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. If her discount rate is 6%, should she accept the project?
A) Yes, because the NPV is positive at that rate.
B) No, because the NPV is negative at that rate.
C) No, because the NPV is positive at that rate.
D) Cannot be determined from the information given.

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. If her discount rate is 6%, should she accept the project?
A) Yes, because the NPV is positive at that rate. 
B) No, because the NPV is negative at that rate. 
C) No, because the NPV is positive at that rate. 
D) Cannot be determined from the information given.

Quizplus · Accepted Answer

B) The point at which the graph line cuts the Discount Rate axis is in the negative NPV region.

Use the Information for the Question(s) Below