Firm B wants to hire Ms. Ali to manage its advertising department. The firm offered Firm B wants to hire Ms. Ali to manage its advertising department. The firm offered Ms. Ali a three-year employment contract under which it will pay her an $80,000 annual salary in years 0, 1, and 2. Ms. Ali’s projected tax rate is 25 percent in year 0 and 40 percent in years 1 and 2. Firm B’s tax rate for the three-year period is 34 percent.

a. Assuming an 8 percent discount rate for both Firm B and Ms. Ali, compute the NPV of Ms. Ali’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, Ms. Ali requests that the salary payment for year 0 be increased to $140,000 and the salary payments for years 1 and 2 be reduced to $50,000. How would this revision in the timing of the payments change your NPV computation for both parties?

c. Firm B responds to Ms. Ali’s request with a counterproposal. Firm B will pay Ms. Ali $140,000 in year 0 but only $45,000 in years 1 and 2. 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)?

d. Should Ms. Ali accept the original offer or the counterproposal? Support your conclusion with a comparison of the NPV of each offer.