Question

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $24,800,000 be paid to the president upon the completion of her first 9 years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 8 percent on these funds. How much must the company set aside each year for this purpose?

Answer 1

Answer:

The company must set aside $1,985,976.79 each year for this purpose

Explanation:

Data provided in the question:

Required payment = $24,800,000

Time = 9 years

Interest rate = 8% = 0.08

Now,

Required payment = A × [( ( 1+ r )ⁿ - 1) ÷ r ]

Here,

A is the amount required to be set aside each year

Therefore,

$24,800,000 = A × [( ( 1+ 0.08 )⁹ - 1) ÷ 0.08 ]

or

$24,800,000 = A × 12.48755

or

A = $1,985,976.79

Hence,

The company must set aside $1,985,976.79 each year for this purpose