Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 11 years with no salvage value at the end of the 11 years. Ataxia's internal rate of return on this equipment is 6%. Ataxia's discount rate is also 6%. The payback period on this equipment is closest to (Ignore income taxes.):Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

To calculate the payback period, we need to find out how long it takes for the cash inflows to cover the initial investment.

First, we need to find the initial investment. This is not given in the question, so we can assume it to be the present value of the future cash inflows.

Using the provided tables, we can find the discount factor for 11 years at 6%, which is 0.4624.

Then, we can use the internal rate of return of 6% to find the annuity factor for 11 years, which is 6.7848.

Multiplying the annuity factor by the cost of the equipment gives us the present value of the future cash inflows, which is:

PV = $6,784.80 x $1,000 = $6,784,800

Therefore, the initial investment is $6,784,800.

To find the payback period, we need to calculate the cumulative cash inflows until they equal the initial investment.

In this case, the annual cash inflows are $1,000,000.

So, the payback period is:

Payback Period = Initial Investment / Annual Cash Inflows = $6,784,800 / $1,000,000 = 6.785 years

Therefore, the closest answer is B) 7.887 years.

Ataxia Fitness Center Is Considering an Investment in Some Additional