An organization is considering a new program. The business analyst believes that the benefits to the organization would equate to $1,550,000 in five years. If the rate of return for this program is si

The correct answer is A. $1,158,250. This question requires a Present Value (PV) calculation. The organization should invest no more than the present value of the future benefits, because investing more would yield a negative return. The formula is: PV = FV / (1 + r)^n. Here, FV = $1,550,000, r = 0.06, n = 5. So: PV

Program Benefits Management

Question

An organization is considering a new program. The business analyst believes that the benefits to the organization would equate to $1,550,000 in five years. If the rate of return for this program is six percent what is the maximum amount the organization should invest in this program?

Options

A$1,158,250
BIt depends on the internal decision making process.
C$2,074,249
D$1,550,000

How the community answered

(26 responses)

A
73% (19)
B
8% (2)
C
15% (4)
D
4% (1)

Explanation

This question requires a Present Value (PV) calculation. The organization should invest no more than the present value of the future benefits, because investing more would yield a negative return. The formula is: PV = FV / (1 + r)^n. Here, FV = $1,550,000, r = 0.06, n = 5. So: PV = $1,550,000 / (1.06)^5 = $1,550,000 / 1.33823 ≈ $1,158,250. This is Choice A. Investing exactly $1,158,250 today at 6% per year would grow to $1,550,000 in five years - perfectly breaking even. Any investment above this amount would not be justified by the projected benefits.

Topics

#Present Value (PV)#Financial analysis#Investment appraisal#Benefit realization

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