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Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a three-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 three-year employment contract under which it will pay her an $104,000 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 B's tax rate for the three-year period is 34 percent. Use Appendix A and Appendix a. Assuming an 8 percent discount rate for both Firm Band Mrs. X, compute the NPV of Mrs. X's after-tax cash flow from the employment contract and Firm B's after-tax cost of the employment contract. b. To reduce her tax cost, Mrs. X requests that the salary payment for year O be increased to $164,000 and the salary payments for years 1 and 2 be reduced to $74,000. How would this revision in the timing of the payments change your NPV computation for both parties? C-1. Firm B responds to Mrs. X's request with a counterproposal. It will pay her $164,000 in year O but only $69,000 in years 1 and 2. Compute the NPV of Firm B's after-tax cost under this proposal. c-2. From the firm's perspective, is this proposal superior to its original offer ($104,000 annually for three years)? d-1. Firm B responds to Mrs. X's request with a counterproposal. It will pay her $164,000 in year O but only $69,000 in years 1 and 2. Complete the below table to calculate the NPV of Mrs. X's after-tax cash flow. d-2. Should Mrs. X accept the original offer or the counterproposal? Complete this question by entering your answers in the tabs below. Reg A Req B Req C1 Req C2 Reg D1 Req D2 Assuming an 8 percent discount rate for both Firm B and Mrs. X, compute the NPV of Mrs. X's after-tax cash flow from the employment contract and Firm B's after-tax cost of the employment contract. (Deductions and Cash Outflows should be entered with a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount. Enter tax rate in two decimals and not in percentage.) Show less A Year 0 Year 1 Year 2 Mrs. X Before-tax salary/income Marginal tax rate Tax on income
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