French Corporation wishes to hire Leslie as a consultant to design a comprehensive staff training program. The project is expected to take one year, and the parties have agreed to a tentative price of $60,000. French Corporation has proposed payment of one-half of the fee now, with the remainder paid in one year when the project is complete. Use Appendix A and Appendix B Required: a. If Leslie expects her marginal tax rate to be 24 percent this year and 35 percent next year, calculate the after-tax net present value of this contract to Leslie, using a 6 percent discount rate. b. French Corporation expects its marginal tax rate to be 21 percent both years. Calculate the net present value of French's after-tax cost to enter into this contract using a 6 percent discount rate. c-1. Given that Leslie expects her tax rate to increase next year, she would prefer to receive more of the income from the project up front. Consider an alternative proposal under which French pays Leslie $42,000 this year, and $16,000 in one year when the contract is complete. Calculate the after-tax benefit of this counterproposal to Leslie and the after-tax cost to French. c-2. Are both parties better off under this alternative than under the original plan? Req A Req B Req C1 Req C2 If Leslie expects her marginal tax rate to be 24 percent this year and 35 percent next year, calculate the after-tax net present value of this contract to Leslie, using a 6 percent discount rate. (Cash outflows and negative amounts should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount.) Year 0: Cash received Tax cost Net cash flow Year 1: Cash received Tax cost Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV Amount Show less Req A Req B Req C1 Req C2 French Corporation expects its marginal tax rate to be 21 percent both years. Calculate the net present value of French's after-tax cost to enter into this contract using a 6 percent discount rate. (Cash outflows and negative amounts should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount.) Year 0: Cash paid Tax savings Net cash flow Year 1: Cash paid Tax savings Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV Amount Show less Value of restructured transaction to Leslie: Year 0: Cash received Amount Tax cost Net cash flow Year 1: Cash received Tax cost Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV Cost of restructured transaction to French: Year 0: Cash paid Tax savings Net cash flow Year 1: Cash paid Tax savings Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV APPENDIX A Present Value of $1 Periods 3% 4% 5% 6% 7% 8% 9% 1 .971 .962 .952 .943 .935 .926 .917 2 .943 .925 .907 .890 .873 .857 .842 3 .915 .889 .864 .840 .816 .794 .772 4 .888 .855 .823 .792 .763 .735 .708 5 .863 .822 .784 .747 .713 .681 .650 6 .837 .790 .746 .705 .666 .630 .596 7 .813 .760 .711 .665 .623 .583 .547 8 .789 .731 .677 .627 .582 .540 .502 9 .766 .703 .645 .592 .544 .500 .460 10 .744 .676 .614 .558 .508 .463 .422 11 .722 .650 .585 .527 .475 .429 388 12 .701 .625 .557 .497 .444 .397 .356 13 .681 .601 .530 .469 .415 .368 .326 14 .661 .577 .505 .442 .388 .340 .299 15 .642 .555 .481 .417 .362 .315 .275 16 .623 .534 .458 .394 339 .292 .252 17 .605 .513 .436 .371 .317 .270 .231 18 .587 .494 416 .350 .296 .250 212 19 .570 .475 .396 .331 .277 232 .194 20 .554 .456 .377 .312 .258 215 .178 Periods 10% 11% 12% 13% 14% 15% 20% 1 .909 .901 .893 .885 .877 .870 .833 2 .826 .812 .797 .783 .769 .756 .694 3 .751 .731 .712 .693 .675 .658 .579 4 .683 .659 .636 .613 592 .572 .482 5 .621 .593 .567 .543 .519 .497 .402 6 .564 .535 .507 .480 .456 .432 .335 7 .513 .482 .452 .425 .400 .376 .279 8 .467 .434 .404 .376 .351 .327 233 9 .424 .391 .361 .333 .308 .284 .194 10 .386 .352 .322 .295 .270 .247 .162 11 .350 .317 .287 .261 .237 .215 .135 12 .319 .286 257 .231 .208 .187 .112 13 .290 .258 .229 .204 .182 .163 .093 14 .263 .232 .205 .181 .160 .141 .078 15 .239 .209 .183 .160 .140 .123 .065 16 .218 .188 .163 .141 .123 .107 .054 17 .198 .170 .146 .125 .108 .093 .045 18 .180 .153 .130 .111 .095 .081 .038 19 .164 .138 .116 .098 .083 .070 .031 20 .149 .124 .104 .087 .073 .061 .026 APPENDIX B Present Value of Annuity of $1 Periods 3% 4% 5% 6% 7% 8% 9% 1 .971 .962 .952 .943 .935 .926 .917 2 1.913 1.886 1.859 1.833 1.808 1.783 1.759 3 2.829 2.775 2.723 2.673 2.624 2.577 2.531 4 3.717 3.630 3.546 3.465 3.387 3.312 3.240 5 4.580 4.452 4.329 4.212 4.100 3.993 3.890 6 5.417 5.242 5.076 4.917 4.767 4.623 4.486 7 6.230 6.002 5.786 5.582 5.389 5.206 5.033 8 7.020 6.733 6.463 6.210 5.971 5.747 5.535 9 7.786 7.435 7.108 6.802 6.515 6.247 5.995 10 8.530 8.111 7.722 7.360 7.024 6.710 6.418 11 9.253 8.760 8.306 7.887 7.499 7.139 6.805 12 9.954 9.385 8.863 8.384 7.943 7.536 7.161 13 10.635 9.986 9.394 8.853 8.358 7.904 7.487 14 11.296 10.563 9.899 9.295 8.745 8.244 7.786 15 11.938 11.118 10.380 9.712 9.108 8.559 8.061 16 12.561 11.652 10.838 10.106 9.447 8.851 8.313 17 13.166 12.166 11.274 10.477 9.763 9.122 8.544 18 13.754 12.659 11.690 10.828 10.059 9.372 8.756 19 14.324 13.134 12.085 11.158 10.336 9.604 8.950 20 14.877 13.590 12.462 11.470 10.594 9.818 9.129 Periods 10% 11% 12% 13% 14% 15% 20% 1 .909 .901 .893 .885 .877 .870 .833 2 1.736 1.713 1.690 1.668 1.647 1.626 1.528 3 2.487 2.444 2.402 2.361 2.322 2.283 2.106 4 3.170 3.102 3.037 2.974 2.914 2.855 2.589 5 3.791 3.696 3.605 3.517 3.433 3.352 2.991 6 4.355 4.231 4.111 3.998 3.889 3.784 3.326 7 4.868 4.712 4.564 4.423 4.288 4.160 3.605 8 5.335 5.146 4.968 4.799 4.639 4.487 3.837 9 5.759 5.537 5.328 5.132 4.946 4.772 4.031 10 6.145 5.889 5.650 5.426 5.216 5.019 4.192 11 6.495 6.207 5.938 5.687 5.453 5.234 4.327 12 6.814 6.492 6.194 5.918 5.660 5.421 4.439 13 7.103 6.750 6.424 6.122 5.842 5.583 4.533 14 7.367 6.982 6.628 6.302 6.002 5.724 4.611 15 7.606 7.191 6.811 6.462 6.142 5.847 4.675 16 7.824 7.379 6.974 6.604 6.265 5.954 4.730 17 8.022 7.549 7.120 6.729 6.373 6.047 4.775 18 8.201 7.702 7.250 6.840 6.467 6.128 4.812 19 8.365 7.839 7.366 6.938 6.550 6.198 4.843 20 8.514 7.963 7.469 7.025 6.623 6.259 4.870