Question

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 $72,500. 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

. If Leslie expects her marginal tax rate to be 20 percent this year and 30 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 26 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 $51,000 this year, and $20,000 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?

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 $51,000 this year, and $20,000 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.

	B Year 0: Cash paid Tax savings Net cash flow $0 Year 1: Cash paid Tax savings Net cash flow $0 Discount factor (6%) 0.943 Present value of year 1 cash flow NPV

c Value of restructured transaction to Leslie: Year 0: Cash received Tax cost Net cash flow $0 Year 1: Cash received Tax cost Net cash flow $0 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 $0 Year 1: Cash paid Tax savings Net cash flow $0 Discount factor (6%) Present value of year 1 cash flow $0 NPV

Answer 1