Holiday Tours (HT) has an employment contract with its newly hired CEO. The cont

Question

Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $27 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 6.0 percent on the funds. How much must HT set aside each year for this purpose?
a. $8,480,964.95
b. $1,620,000.00
c. $8,244,770.07
d. $2,218,149.02
e. $8,226,536.00

Explanation / Answer

Future value of annuity = P×[(1+r)^n-1]÷r

r is interest rate per period

P is payment per period

n is number of payments

$27,000,000 = P×[(1+6%)^3-1]÷6%

Amount set aside each year, P = $8,480,964.95

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