KP Incorporated is negotiating a 10-year lease for three floors of space in a commercial office building. KP can't use the space unless a security system is installed. The cost of the system is $50,000, and it will qualify as seven-year recovery property under MACRS. The building's owner has offered KP a choice. The owner will pay for the installation of the security system and charge $79,000 annual rent. Alternatively, KP can pay for the installation of the security system, and the owner will charge only $72,000 annual rent. Assume that KP has a 21 percent marginal tax rate, cannot make a Section 179 election to expense the $50,000 cost, and uses a 9 percent discount rate. Use Table 7-2, Appendix A and Appendix B. Required: a-1. Calculate the NPV of the security system. a-2. Calculate the NPV of the after-tax cost of each alternative. b. Which alternative should it choose? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Calculate the NPV of the after-tax cost of each alternative. (Round intermediate computations and final answers to the nearest whole dollar amount. Cash outflows and Negative amount should be indicated by a minus sign.) First alternative: Annual rent Tax savings of rent deduction $ (79,000) $ (79,000) After-tax cost of annual rent After-tax cost of year 0 rent NPV of after-tax cost of rent for years 1-9 NPV of annual rent cost $ 0 Second alternative: Annual rent Tax savings of rent deduction After-tax cost of annual rent After-tax cost of year 0 rent NPV of after-tax cost of rent for years 1-9 NPV of annual rent cost NPV of cost of leasehold improvement $ 0 Present Value of Annuity of $1 Periods 3% 4% 5% 6% 7% 8% 9% 1 .971 962 952 943 .935 .926 .917 2 1.913 1.886 1.859 1.833 1.808 1.783 1.759 3 2.829 2.775 2.723 2.673 2.624 2.577 2.531 4 3.717 3.630 3.546 3.465 3.387 3.312 3.240 5 4.580 4.452 4.329 4.212 4.100 3.993 3.890 6 5.417 5.242 5.076 4.917 4.767 4.623 4.486 7 6.230 6.002 5.786 5.582 5.389 5.206 5.033 8 7.020 6.733 6.463 6.210 5.971 5.747 5.535 9 7.786 7.435 7.108 6.802 6.515 6.247 5.995 10 8.530 8.111 7.722 7.360 7.024 6.710 6.418 11 9.253 8.760 8.306 7.887 7.499 7.139 6.805 12 9.954 9.385 8.863 8.384 7.943 7.536 7.161 13 10.635 9.986 9.394 8.853 8.358 7.904 7.487 14 11.296 10.563 9.899 9.295 8.745 8.244 7.786 15 11.938 11.118 10.380 9.712 9.108 8.559 8.061 16 12.561 11.652 10.838 10.106 9.447 8.851 8.313 17 13.166 12.166 11.274 10.477 9.763 9.122 8.544 18 13.754 12.659 11.690 10.828 10.059 9.372 8.756 19 14.324 13.134 12.085 11.158 10.336 9.604 8.950 20 14.877 13.590 12.462 11.470 10.594 9.818 9.129 Periods 10% 11% 12% 13% 14% 15% 20% 1 .909 .901 .893 .885 .877 .870 .833 2 1.736 1.713 1.690 1.668 1.647 1.626 1.528 3 2.487 2.444 2.402 2.361 2.322 2.283 2.106 4 3.170 3.102 3.037 2.974 2.914 2.855 2.589 5 3.791 3.696 3.605 3.517 3.433 3.352 2.991 6 4.355 4.231 4.111 3.998 3.889 3.784 3.326 7 4.868 4.712 4.564 4.423 4.288 4.160 3.605 8 5.335 5.146 4.968 4.799 4.639 4.487 3.837 9 5.759 5.537 5.328 5.132 4.946 4.772 4.031 10 6.145 5.889 5.650 5.426 5.216 5.019 4.192 11 6.495 6.207 5.938 5.687 5.453 5.234 4.327 12 6.814 6.492 6.194 5.918 5.660 5.421 4.439 13 7.103 6.750 6.424 6.122 5.842 5.583 4.533 14 7.367 6.982 6.628 6.302 6.002 5.724 4.611 15 7.606 7.191 6.811 6.462 6.142 5.847 4.675 16 7.824 7.379 6.974 6.604 6.265 5.954 4.730 17 8.022 7.549 7.120 6.729 6.373 6.047 4.775 18 8.201 7.702 7.250 6.840 6.467 6.128 4.812 19 8.365 7.839 7.366 6.938 6.550 6.198 4.843 20 8.514 7.963 7.469 7.025 6.623 6.259 4.870 Present Value of $1 Periods 3% 4% 5% 6% 7% 8% 9% 1 .971 .962 .952 .943 .935 .926 .917 2 943 .925 .907 .890 .873 .857 .842 3 .915 .889 .864 .840 .816 .794 .772 4 .888 .855 .823 .792 .763 .735 .708 5 .863 .822 .784 .747 .713 .681 .650 6 .837 .790 .746 .705 .666 .630 .596 7 .813 .760 .711 .665 .623 .583 .547 8 .789 .731 .677 .627 .582 540 .502 9 .766 .703 .645 592 .544 .500 .460 10 .744 .676 .614 .558 .508 .463 .422 11 .722 .650 .585 .527 .475 .429 .388 12 .701 .625 .557 .497 .444 .397 .356 13 .681 .601 .530 .469 .415 .368 .326 14 .661 .577 .505 .442 .388 .340 .299 15 .642 .555 .481 .417 .362 .315 .275 16 .623 .534 .458 394 .339 .292 .252 17 .605 .513 .436 .371 .317 .270 .231 18 .587 .494 .416 .350 .296 .250 .212 19 .570 .475 .396 .331 .277 .232 .194 20 .554 .456 .377 .312 .258 .215 .178 Periods 10% 11% 12% 13% 14% 15% 20% 1 .909 .901 .893 .885 .877 .870 .833 2 .826 .812 .797 .783 .769 .756 .694 3 .751 .731 .712 .693 .675 .658 .579 4 .683 .659 .636 .613 .592 .572 .482 5 .621 .593 .567 .543 .519 .497 .402 6 .564 .535 .507 .480 .456 .432 .335 7 .513 .482 .452 .425 .400 .376 .279 .467 .434 404 .376 351 .327 .233 9 .424 .391 361 .333 .308 .284 .194 10 .386 .352 322 .295 .270 .247 .162 11 .350 .317 .287 .261 .237 .215 .135 12 .319 .286 .257 .231 .208 .187 .112 13 .290 .258 .229 .204 .182 .163 .093 14 .263 .232 .205 .181 .160 .141 .078 15 .239 .209 .183 .160 .140 .123 .065 16 .218 .188 .163 .141 .123 .107 .054 17 .198 .170 .146 .125 .108 .093 .045 18 .180 .153 130 .111 .095 .081 .038 19 .164 .138 .116 .098 .083 .070 .031 20 .149 .124 .104 .087 .073 .061 .026 TABLE 7.2 MACRS for Business Personalty (Half-Year Convention) Recovery Period Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year Depreciation Rate 1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750% 2 44.45 32.00 24.49 18.00 9.50 7.219 3 14.81 19.20 17.49 14.40 8.55 6.677 4 7.41 11.52 12.49 11.52 7.70 6.177 5 11.52 8.93 9.22 6.93 5.713 6 5.76 8.92 7.37 6.23 5.285 7 8.93 6.55 5.90 4.888 8 4.46 6.55 5.90 4.522 9 6.56 5.91 4.462 10 6.55 5.90 4.461 11 3.28 5.91 4.462 12 5.90 4.461 13 5.91 4.462 14 5.90 4.461 15 5.91 4.462 16 2.95 4.461 17 4.462 18 4.461 19 4.462 20 4.461 21 2.231