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? Appendix A Present Value of $1 3% 4% 5% 7% 8% 9% Periods 1 2 3 00 OWN 6% 943 890 840 .792 747 .705 971 943 915 888 863 837 813 789 766 1744 722 701 681 665 8 9 10 11 12 13 14 15 16 17 18 19 20 962 925 889 855 822 790 760 731 703 676 650 625 601 577 555 952 907 864 823 784 1746 1711 677 .645 614 585 557 530 505 481 458 436 416 396 377 935 873 816 763 713 666 .623 582 544 508 475 444 415 388 362 339 317 296 277 258 627 .592 558 527 497 469 442 417 394 371 350 331 926 857 794 735 681 630 583 540 500 463 429 397 368 340 315 292 270 250 232 215 917 842 772 .708 650 596 547 502 460 422 388 356 326 299 275 252 231 212 194 178 661 534 513 642 623 605 587 570 554 494 475 456 312 Periods 1 13% 15% 20% UNO OU UN 8 9 10% 909 826 751 683 621 564 513 467 424 386 350 319 290 263 239 218 198 180 164 149 11% 1901 812 1731 659 593 535 482 434 391 352 317 286 258 232 209 188 170 153 138 124 12% 893 797 712 636 567 507 452 404 361 322 287 257 229 205 183 163 146 130 116 104 885 .783 693 613 543 480 425 376 333 295 261 231 204 181 160 141 125 111 098 087 14% 877 769 675 592 519 456 400 35 308 270 237 20B 182 160 140 123 108 095 083 073 870 756 658 572 497 432 376 327 284 247 215 187 163 141 123 107 093 OBT 070 061 833 694 579 482 402 1335 279 233 194 162 135 112 093 078 .065 054 045 038 031 025 14 15 16 17 18 19 20 Appendix D Present Value of Annuity of $1 Periods 5% 6% 7% B% 9% 8 9 10 11 12 13 14 15 16 17 18 19 20 3% 971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.877 4% 962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11,274 11.690 12.085 12.462 943 1.833 2673 3.465 4.212 4.917 5.582 6.210 6.B02 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 .935 1 BOB 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7499 7943 8.358 8.745 9.108 9.447 9.763 10.059 10.335 10.594 926 1.783 2577 3312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 917 1.759 25 3240 3890 4.486 5.033 5.535 5.995 6.41B 6.805 7.161 7.487 7.786 8,061 8313 8.544 8.756 8 950 9.129 Periods 11% 13% 14% 15% 1 2 9 10 11 12 13 14 15 16 17 18 19 20 10% 909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7 367 7.606 7.824 8022 8.201 8.365 8.514 901 1.713 2.444 3.102 3.696 4231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7702 7.839 7.963 12% 893 1.690 2.402 3.037 3.605 4.111 4.564 4968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7,025 877 1647 2.322 2914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.255 6.373 6.467 6.550 6.623 870 1.626 2 283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 20% 833 1.528 2 106 2589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4611 4675 4.730 4775 4812 4 843 4.870 Reg A ReqB Reg 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.) Amount Year 0: Cash received Tax cost Net cash flow 0 Year 1 Cash received Tax cost Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV $ Req A Req B Reg 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.) Show less Amount Year : Cash paid Tax savings Net cash flow $ 0 Year 1: Cash paid Tax savings Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV $ 0 Req A ReqB Reqli Reg C2 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. (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.) Show less Amount Value of restructured transaction to Leslie Year : Cash received Tax cost $ Net cash flow 0 Year 1: $ 0 Cash received Tax cost Net cash flow Discount factor (6%) Present value of year 1 cash flow NPV Req A ReqB Req C1 Req C2 Are both parties better off under this alternative than under the original plan? Yes No