A fitness center is considering an investment in some additional weight training

Question

A fitness center is considering an investment in some additional weight training equipment. The equipment is estimated urself life of 10 years with no salvage value at the end of the 10 years. The fitness center's internal rate of return on this equipment is 8%. The center's discount rate is also 8%. The payback period on this equipment is closest to (ignore income taxes): -10 years -6.71 years -5 years -7.81 years A fitness center is considering an investment in some additional weight training equipment. The equipment is estimated urself life of 10 years with no salvage value at the end of the 10 years. The fitness center's internal rate of return on this equipment is 8%. The center's discount rate is also 8%. The payback period on this equipment is closest to (ignore income taxes): -10 years -6.71 years -5 years -7.81 years -10 years -6.71 years -5 years -7.81 years

Explanation / Answer

Answer :- Option B). 6.71 Years.

Explanation :- Pay back period = Cumulative present value factor for 10 years at an internal rate of return (IRR) of 8 %.

= [ 1 - (1 + 0.08)-10 ] / 0.08

= [ 1 - (1.08)-10 ] / 0.08

= [ 1 - 0.4632 ] / 0.08

= 0.5368 / 0.08

= 6.71 Years. (Option B).

Conclusion :- Payback period of an equipment in the given question = 6.71 Years. (Option B).

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