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Johnson Company has a management contract with its newly hired president. The contract requires a lump...

Johnson Company has a management contract with its newly hired president. The contract requires a lump sum payment of $12 million be paid to the president upon the completion of his first five 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 6% on these funds. How much must the company set aside each year for this purpose? $2,430,154 $2,372,198 $2,296,513 $2,128,757 $2,019,558

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Answer #1

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

12,000,000=Annuity[(1.06)^5-1]/0.06

12,000,000=Annuity*5.63709296

Annuity=12,000,000/5.63709296

=$2,128,757(Approx).

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