Reference no: EM131962365

Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a 3-year employment contract under 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 25 percent rate in year 0 and a 40 percent rate in years 1 and 2. Firm B’s tax rate for the 3-year period is 35 percent. Use Appendix A and Appendix B. a. 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. b. To reduce her tax cost, Mrs. X requests that the salary payment for year 0 be increased to $107,500 and the salary payments for years 1 and 2 be reduced to $47,500. 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 $107,500 in year 0 but only $42,500 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 ($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 in year 0 but only $42,500 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 counter proposal?