Melinda has been offered two competing employment contracts for the next two years. Argus Corporation will pay her a $75,000 salary in both 2012 and 2013. Dynamic Corporation will pay Melinda a $100,000 salary in 2012 and a $49,000 salary in 2013. Melinda expects to be in the 25 percent marginal tax bracket in 2012 and in the 33 percent marginal tax bracket in 2013 (due to a significant amount of income from new rental properties). She does not expect either offer to change her marginal tax bracket for either year. Both Argus Corporation and Dynamic Corporation expect their marginal tax brackets to remain at 34 percent over the two-year period and expect that employment tax rates will remain the same.
a. Compute the net present value of the after-tax cash flow for Melinda and after-tax cost for Argus and Dynamic for each of the proposed employment contracts using a 6 percent discount rate.
b. Which alternative is better for Melinda and which is better from the corporation’s perspective?
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