Question

1. A major drug company anticipates that in future years it could be involved in litigation regarding perceived side effects of one of its antidepressant drugs. In order to prepare a war chest, the company wants to have $ 200 million available in 8 years from now. The company expects to set aside $11 million the fourth year and uniformly increasing amounts in each of the next 5 years. If the company can earn 12% per year on the money sets aside, by now how much must it increase the amount set aside each year to achieve the goal of $200 million at the end of 8 years? (10 pts) GER

Answer 1

Total No of Deposits = 6

Fixed Amount, A = $11 million

r = 12%

Hence FV at the end of 8th year = A*((1+r)^n-1)/r

=11*((1+12%)^6-1)/12%

=11*((1.12^6-1)/0.12

=11*(1.9738-1)/0.12

=11*0.9738/0.12

=$89.27

Hence Remaining Amount required = 200-89.27=$110.73 million

Hence FV of uniform gradient should be $110.73 million

Hence FV = G*((1+r)^n-r*n-1)/i^2

or, 110.73 = G*((1+12%)^6-12%*6-1)/12%^2

or, 110.73 = G*(1.12^6-0.12*6-1)/0.12^2

or, 110.73 = G*(1.9738-0.72-1)/0.0144

or, 110.73 = G*0.2538/0.0144

or, G = 110.73*0.0144/0.2538

or, G = $6.28

Hence Annual Increase amount is $6.28