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 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

The payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment. Since the internal rate of return (IRR) equals the discount rate (8%), the investment is expected to break even exactly at its expected life span if we were considering the net present value (NPV). However, the payback period disregards the time value of money, focusing instead on how quickly the initial investment can be recovered through cash inflows. The choice closest to the typical calculation method, without specific cash flow information provided, is 6.71 years, which likely comes from an estimation or calculation based on expected annual cash inflows and the total investment cost.

Ataxia Fitness Center Is Considering an Investment in Some Additional