Question

Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sumpayment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose? A. $3,184,467B.$3,277,973C. $3,006,409D. $3,318,190E. $3,466,667

Answer 1

From the options provided, the amount of money HT must set aside each year for this purpose is B. $3,277,973

Step-by-step explanation:

We are provided with the following data from the question;

Amount to be paid to the CEO upon successful completion of first three years of service = $10.4 million

Amount to be earned on the anticipated cash outflow = 5.65 percent on the funds.

number of years = 3 years

solve

$10,400,000 = C × (1 + 0.0565)³ - 1 / 0.0565

$10,400,000 = C × 0.17925/0.0565

$10,400,000 = C × 3.1726

C = $10,400,000 ÷ 3.1726

C = $3,277,973

The amount Holiday Tours (HT) must set aside each year for this purpose is $3,277,973