KP Incorporated is negotiating a 10-year lease for three floors of space in a commercial office building. KP can’t use t

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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?