Meijer Inc., has a management contract with its newly hired vice president. The
ID: 2825899 • Letter: M
Question
Meijer Inc., has a management contract with its newly hired vice president. The contract requires a lump sum payment of $24,600,000 be paid to the vice 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?
Meijer Inc., has a management contract with its newly hired vice president. The contract requires a lump sum payment of $24,600,000 be paid to the vice 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?
Explanation / Answer
Future value = C * [(1 + r)n - 1 ] / r
Future value = $24,600,000
C = Yearly principal = ?
r = Interest rate = 0.07
24600000 = C * [(1 + 0.07)8 - 1 ] / 0.07
1722000 = C * [1.7182 - 1 ]
1722000 = C * 0.7182
C = 2397706.95
Hence each year should set aside $23,97,706.95 to get rquired.