Question

1 2 3 x 5 6 7 8 9 10 -50000 ents -100000 an -- 150000 -200000 Discount Rate 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 nel present value (NPV) as a function of the discount rate. At what discount rate does her decision to renovate become untonable? nete nediat cial Cal O A. 4.8% B. 3.0% OC. 4,0% OD 3.3% ter Rese miesta

Answer 1

Solution In ques hon, elle are given NP V graph on a function of ithe different discount rectes, Hence, we have - - 50,000 Niv at s.l. discount rate of - 100000 NPV at 7.l. discourt rate Now, we are agled the discount rate at which Oure's decision regarding verovation shall be Unterable. This stall occur at that point where NPV of the project stall be equal to 2610 Therefore, to find out the rate of discount at which NPV shall be zero we stall use Linear Extrapolation method :- Let us asume at nl, NPV shall be equal to zero. Hence, we have - 2 - 0 $ 5.7. - - Soooo ( 7) - - 100000 by applying extrapolation method a nol-sl o -1-50,000) 7 .4.-5% -100000 - (- 50,000) 5 m). – 59. - Soooo - 50000 2 2.1. n.1-5% = -1 2.1. 1 → » n 1. % = -2.4. 2) = 3.1. Conclusion :- Therefore, at discount rate of 3%, the NPV shall be equal to zeto

Extrapolation is the process of finding a value outside a data set. It is a useful statistical tool used to estimate values that go beyond a set of given data or observations.