Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 4 years with no salvage value at the end of the 4 years. Ataxia's internal rate of return on this equipment is 5%. Ataxia's discount rate is also 5%. The payback period on this equipment is closest to (Ignore income taxes.):

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factorfs) using the tables provided.

a. 4 years

b. 3.55 years

c. 2.00 years

d. 4.65 years

Question

Business

Ainsley Drake

3 June, 13:07

Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 4 years with no salvage value at the end of the 4 years. Ataxia's internal rate of return on this equipment is 5%. Ataxia's discount rate is also 5%. The payback period on this equipment is closest to (Ignore income taxes.):

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factorfs) using the tables provided.

a. 4 years

b. 3.55 years

c. 2.00 years

d. 4.65 years

+1

Answers (1)

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PBJ · Answer 1

b. 3.55 years

Explanation:

The payback period is basically the amount of time an investor needs to recover his/her initial investment.

lets assume initial investment = $1,000

when you calculate IRR, the present value of the cash flows = initial investment

the present value of an annuity for 4 years and 5% is 3.5460

$1,000 = yearly cash flow x 3.546

yearly cash flow = $1,000 / 3.546 = $282

payback period = $1,000 / 282 = 3.546 years ≈ 3.55 years