Question

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25,400,000 be paid to the president upon the completion of her first 8 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 7 percent on these funds. How much must the company set aside each year for this purpose?

Answer 1

Answer:

The Great Giant Corp.

The Corporation must set aside the sum of $2,475,681.17 in order to achieve $25,400,000 in 8 years at an interest rate of 7%.

Explanation:

a) Data and Calculations:

Future value = $25,400,000

No. of periods = 8 years

Interest rate = 7%

Therefore, annual amount that must be set aside is $2,475,681.17.

Schedule of Payments into the Fund:

Period  Present Value      Annual Payment   Interest          Future Value

1         $0.00                    $-2,475,681.17    $0.00                $2,475,681.17

2       $-2,475,681.17       $-2,475,681.17   $-173,297.68     $5,124,660.02

3       $-5,124,660.02     $-2,475,681.17   $-358,726.20    $7,959,067.38

4       $-7,959,067.38     $-2,475,681.17   $-557,134.72     $10,991,883.27

5      $-10,991,883.27     $-2,475,681.17   $-769,431.83     $14,236,996.26

6      $-14,236,996.26   $-2,475,681.17   $-996,589.74    $17,709,267.17

7      $-17,709,267.17     $-2,475,681.17   $-1,239,648.70   $21,424,597.04

8      $-21,424,597.04   $-2,475,681.17   $-1,499,721.79    $25,400,000.00