Use the Information for the Question(s)below

question 19

Multiple Choice

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)$1 000 000
• B)$780 000
• C)Cannot be determined because inadequate information is given.
• D)The vertical axis crossing point cannot be calculated since the cash inflows are a perpetuity.

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Definitions:

Return on Investment

A measure used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments.

Deferred Tax Liability

A tax obligation owed by an entity in the future due to temporary differences between the book value of assets and liabilities and their tax value.

Income Tax Expense

The expense reported on the income statement that represents the amount of income tax a company owes to governmental authorities.

Tax Rate

The percentage at which an individual or corporation is taxed.