Question

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $24,500,000 be paid to the president upon the completion of her first 6 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 5 percent on these funds. How much must the company set aside each year for this purpose?

Answer 1

Answer:

The company must set aside $3.430.408 for this purpose.

Explanation:

To get this value, you must create a diagram of cash flow, where you put at the end of the sixth year the total payment (outflow) $24.500.000 and going backwards putting in each year the same amount (with an X, because you do not know it and have to calculate it) of money as inflow. Then recreate a financial formula taking in consideration total time that X will be gaining interest as follow: 24.500.000 = x*(1+0,05)^1+x*(1+0,05)^2+x*(1+0,05)^3+x*(1+0,05)^4+x*(1+0,05)^4+x*(1+0,05)^5+x*(1+0,05)^6