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

Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $28 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 6.5 percent on the funds. How much must HT set aside each year for this purpose?

$2,472,882.51

$1,820,000.00

$8,508,373.12

$8,489,556.06

$8,752,119.65

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Answer #1

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

28,000,000=Annuity[(1.065)^3-1]/0.065

28,000,000=Annuity*3.199225

Annuity=28,000,000/3.199225

=$8752119.65(Approx).

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