Problem 3: 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 $80,000 annual salary for three years in years 1,2 and 3. Mrs. X projects that her salary will be taxed at a 25% rate in year 1 and a 40% rate in years 2 and 3. Firm B's tax rate for all three years is expected to be 34%. Also, she and the firm will each pay 6.2% on all amounts up to the threshold rate for OASDI, and 1.45% on the total amount of the salary. The OASDI threshold rates are as follows: Year 1: $86,400; Year 2: 87,000; Year 3: $87,900.

a.Assuming an 8% 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. (5 points)

b.To reduce her tax cost, Mrs. X requests that the salary payment for year 1 by increased to $140,000 and the salary payments for years 2 and 3 be reduced to $50,000. How would this revision in the timing of the payments change your NPV computations for the two parties? (5 points)

c.Firm B responds to Mrs. X's request with a counterproposal. It will pay her $140,000 in year 1 but only $45,000 in years 2 and 3. Compute the NPV of Firm B's after-tax cost under this proposal. From the firm's perspective, is this proposal superior to its original offer ($80,000 annually for three years? (5 points)

d.Should Mrs. X accept the original offer or the counterproposal? Support your conclusion with a comparison of the NPV of each offer. (5 points)