Luis Has a Management Contract Which Grants Him a Lump

question 67

Multiple Choice

Luis has a management contract which grants him a lump sum payment of $20 million be paid 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 4.5 percent on these funds. How much must the company set aside each year for this purpose?

• A) $3,775,042.93
• B) $3,798,346.17
• C) $3,801,033.67
• D) $3,655,832.79
• E) $4,038,018.22

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Definitions:

Depreciation Expense

An accounting method of allocating the cost of a tangible asset over its useful life to account for declines in value.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since it was acquired, reducing its book value on the balance sheet.

Working Capital

The difference between a company's current assets and current liabilities, indicating short-term financial health and operational efficiency.

Balance Sheet

An accounting report detailing a business's assets, debts, and owner's equity on a certain date.