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The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25,300,000 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

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Answer: $3,719,548.95

Explanation:

As the amount will be an equal amount each year, it is an annuity. The lump sum to be paid in 6 years growing at 5% would be the present value of this annuity.

The payment will be;

FV = Payment * Future value interest factor of annuity, 6 years, 5%

25,300,000 = Payment * 6.8019

Payment = 25,300,000/6.8019

Payment = $3,719,548.95

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