Ataxia Fitness Center is considering an investment in some additional weight tra

Question

Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 10 years with no salvage value at the end of the 10 years. Ataxia's internal rate of return on this equipment is 8%. Ataxia's discount rate is also 8%. The payback period on this equipment is closest to (Ignore income taxes.): Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice 10 years 6.71 years 5 years 7.81 years

Explanation / Answer

Let the initial outlay be $50000.

At irr,present value of inflows=present value of outflows.

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

50000=Annuity[1-(1.08)^-10]/0.08

50000=Annuity*6.710081399

Annuity=50000/6.710081399

=$7451.474435

Hence payback period=initial outlay/annual cash flows

=(50000/7451.474435)

=6.71 years(Approx).

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