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 $69,000. 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. a. If Leslie expects her marginal tax rate to be 25 percent this year and 35 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 31 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 $48,000 this year, and $18,000 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? Complete this question by entering your ans nswers in the tabs below. Req C2 Req A Req B Req C1 If Leslie expects her marginal tax rate to be 25 percent this year and 35 percent next year, calculate the after-tax net present value of this contract to Leslie, using a 6 percent discount rate. (Cash outflows and Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answers to the nearest whole dollar amount.) Year 0: Cash received Tax cost Net cash flow S 0 Year 1 Cash received Tax cost S Net cash flow 0 Discount factor (6%) Present value of year 1 cash flow NPV Req A Req B 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 $69,000. 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. a. If Leslie expects her marginal tax rate to be 25 percent this year and 35 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 31 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 $48,000 this year, and $18,000 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? Complete this question by entering your answers in the tabs below Req C2 Req A Req B Req C1 French Corporation expects its marginal tax rate to be 31 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. (Cash outflows and Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answers to the nearest whole dollar amount.) Show less A Year 0 Cash paid Tax savings $ Net cash flow Year 1 Cash paid Tax savings Net cash flow Discount factor (6 %) Present value of year 1 cash flow NPV Req C1 меч с 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 $48,000 this year, and $18,000 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. (Cash outflows and Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answers to the nearest whole dollar amount.) Show less Value of restructured transaction to Leslie: Year 0: Cash received Tax cost S Net cash flow C Year 1: Cash received Тах сost Net cash flow C Discount factor (6 % ) Present value of year 1 cash flow NPV Cost of restructured transaction to French: Year 0 Cash paid Tax savings S Net cash flow 0 Year 1: Cash paid Tax savings S Net cash flow 0 Discount factor (6%) Present value of year 1 cash flow S C NPV Req B Req C2

Answer 1

we will use discount factor PRESENT VALUE OF $1 for n = 1 year i = 6%

= [1/1.06]¹

=0.943

Year 0
Cash received	34,500	69000*1/2
Tax cost	-8625	25%
Net cash flow	25875	34500-8625
Year 1
Cash received	34500
Tax cost	-12075	35%
Net cash flow	22425
discount factor(6%)	0.943
Present value of year 1 cash flow	21147	[22425*0.943]
NPV	47,022	[25875+21147]

req b.

Year 0
Cash paid	-34,500	69000*1/2
Tax cost	10695	31%
Net cash flow	-23805	-34500+10695
Year 1
Cash paid	-34500
Tax cost	10695	31%
Net cash flow	-23805
discount factor(6%)	0.943
Present value of year 1 cash flow	-22448	[23805*0.943]
NPV	-46253	[23805+22448]

req c-1

restructured to leslie
Year 0
Cash received	48000
Tax cost	-12000	25%*48000
Net cash flow	36000	48000-12000
Year 1
Cash received	18000
Tax cost	-6300	35%*18000
Net cash flow	11700
discount factor(6%)	0.943
Present value of year 1 cash flow	11033	[11700*0.943]
NPV	47033	[36000+11033]

restructured for french
Year 0
Cash paid	-48000
Tax cost	14880	31%
Net cash flow	-33120	-48000+14880
Year 1
Cash paid	-18000
Tax cost	5580	31%
Net cash flow	-12420
discount factor(6%)	0.943
Present value of year 1 cash flow	-11712	[-12420*0.943]
NPV	-44832

REQC-2

yes both the company are better off with option c1 as the cash outflow of french reduces and cash inflow of leslie increases.