KP Incorporated is negotiating a 10-year lease for three floors of space in a commercial office building. KP cant 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 buildings 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?