Firm B wants to hire Mrs. X to manage its advertisingdepartment. The firm offered Mrs. X a 3-year employment contractunder which it will pay her an $67,500 annual salary in years 0, 1,and 2. Mrs. X projects that her salary will be taxed at a 25percent rate in year 0 and a 40 percent rate in years 1 and 2. FirmB’s tax rate for the 3-year period is 35 percent. Use Appendix Aand Appendix B. a. Assuming an 8 percent discount rate for bothFirm B and Mrs. X, compute the NPV of Mrs. X’s after-tax cash flowfrom the employment contract and Firm B’s after-tax cost of theemployment contract. b. To reduce her tax cost, Mrs. X requeststhat the salary payment for year 0 be increased to $107,500 and thesalary payments for years 1 and 2 be reduced to $47,500. How wouldthis revision in the timing of the payments change your NPVcomputation for both parties? c-1. Firm B responds to Mrs. X’srequest with a counterproposal. It will pay her $107,500 in year 0but only $42,500 in years 1 and 2. Compute the NPV of Firm B’safter-tax cost under this proposal. c-2. From the firm’sperspective, is this proposal superior to its original offer($67,500 annually for three years)? d-1. Firm B responds to Mrs.X’s request with a counterproposal. It will pay her $107,500 inyear 0 but only $42,500 in years 1 and 2. Complete the below tableto calculate the NPV of Mrs. X’s after-tax cash flow. d-2. ShouldMrs. X accept the original offer or the counterproposal?
