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

1. -1. Calculate the NPV of the security system.
2. a-2. Calculate the NPV of the after-tax cost of each alternative.
3. b. Which alternative should it choose?

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Cost of Improvements $ (50,000) $ Recovery Deduction Tax Savings at 21% 1,500 2,571 1,836 1,311 938 937 938 468 7,145 $ (12,245) (8,745) (6,245) (4,465) (4,460) (4,465) (2,230) Net Cash Flow Present Value at 9%