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

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%.

Step-by-step 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