Question
Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a 3-year employment contract under which it will
Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a 3-year employment contract under which it will pay her an $90,500 annual salary in years 0, 1, and 2. Mrs. X projects that her salary will be taxed at a 25 percent rate in year 0 and a 40 percent rate in years 1 and 2. Firm Bs tax rate for the 3-year period is 30 percent. Use Appendix A and Appendix B. (Negative amounts should be indicated by a minus sign. Enter cash outflows with a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answers to the nearest whole dollar amount. Enter tax rate in decimals and not in percentage.)
a. Assuming an 8 percent discount rate for both Firm B and Mrs. X, compute the NPV of Mrs. Xs after-tax cash flow from the employment contract and Firm Bs after-tax cost of the employment contract.
FIRM B
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