Question

The portfolio steering committee is considering selecting project A. The committee expects the project will produce a one-time benefit of one million dollars five years from now. The interest rate at a local bank is 8% annually. How much would need to be invested in the bank now to obtain the same benefits?

A) $673,012.17
B) $735,537.19
C) $680,851.85
D) $833,333.33

Answer 1

To obtain the same benefits as the one million dollars five years from now, the amount that would need to be invested in the bank now is approximately $680,851.85.

Step-by-step explanation:

To calculate how much would need to be invested in the bank now to obtain the same benefits as the one million dollars five years from now, we can use the formula for the present value of a future cash flow.

The formula is: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.

In this case, the future value is one million dollars, the interest rate is 8% annually, and the number of periods is five years.

Plugging in the values, we get: PV = 1,000,000 / (1 + 0.08)^5 = $680,851.85.

Therefore, the amount that would need to be invested in the bank now to obtain the same benefits is approximately $680,851.85.