The Great Giant Corp. has a management contract with its newly hired president.

Question

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $24,300,000 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?

$2,302,504.83

$2,297,412.63

$1,701,000.00

$1,877,354.84

$2,368,466.63

Explanation / Answer

Solution :

PMT = FV X r / [(1+r)^n] – 1

PMT = Yearly set aside amount,

FV =Future value = 24300000

r = rate of interest = 7 %

n = period=8

PMT = 24300000 X 0.07 / [(1+0.07]^8]-1

=1701000/0.71818618

=$2368466.63

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