Answer Happy

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 $ (79,000) Tax savings of rent deduction After-tax cost of annual rent (79,000) 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 0 After-tax cost of year 0 rent NPV of after-tax cost of rent for years 1-9 NPV of annual rent cost 0 NPV of cost of leasehold improvement $ $ $ $
Present Value of Annuity of $1 Periods 3% 1 971 2 1.913 3 2.829 4 3.717 5 4.580 6 5.417 7 6.230 8 7.020 9 7.786 10 8.530 11 9.253 12 9.954 13 10.635 14 11.296 15 11.938 16 12.561 17 13.166 18 13.754 19 14.324 20 14.877 Periods 10% 1 909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4% 962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 11% 901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 5% 952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 12% .893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 6% 943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 13% .885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025 7% 935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 14% .877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 8% 926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 15% .870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 9% 917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 20% .833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870
Present Value of $1 Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 3% 971 943 915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 587 570 .554 10% .909 .826 .751 .683 .621 .564 513 .467 .424 .386 .350 .319 .290 .263 239 218 .198 .180 .164 .149 4% .962 925 .889 .855 .822 .790 .760 .731 .703 .676 .650 .625 .601 577 555 534 513 494 475 .456 11% 901 .812 .731 .659 593 535 .482 .434 391 .352 317 286 .258 232 .209 .188 .170 .153 .138 .124 5% .952 907 .864 .823 .784 .746 .711 .677 .645 .614 585 557 530 .505 481 .458 .436 .416 396 377 12% .893 .797 712 .636 .567 .507 .452 .404 .361 .322 287 257 .229 .205 .183 .163 .146 .130 .116 .104 6% 943 .890 .840 .792 .747 .705 .665 .627 592 .558 527 .497 469 442 417 394 .371 .350 331 312 13% .885 .783 .693 .613 543 480 425 .376 333 .295 .261 .231 204 .181 .160 .141 .125 .111 .098 .087 7% 935 .873 .816 .763 .713 .666 .623 582 544 508 475 .444 .415 388 362 339 317 296 277 258 14% .877 .769 .675 592 519 .456 .400 .351 308 .270 237 .208 .182 .160 .140 .123 .108 .095 .083 .073 8% 926 .857 .794 .735 .681 .630 583 .540 .500 463 429 397 368 340 315 292 270 250 232 215 15% .870 .756 .658 572 497 432 376 327 284 .247 215 .187 .163 .141 .123 .107 .093 .081 .070 .061 9% 917 .842 .772 .708 .650 .596 547 502 .460 422 388 .356 326 299 275 252 231 212 194 .178 20% .833 .694 579 .482 .402 335 279 233 194 .162 135 .112 .093 .078 .065 .054 .045 .038 .031 .026
TABLE 7.2 MACRS for Business Personalty (Half-Year Convention) Recovery Period 7-Year Year 3-Year 5-Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 33.33% 44.45 14.81 7.41 20.00% 32.00 19.20 11.52 11.52 5.76 10-Year 10.00% 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28 Depreciation Rate 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 15-Year 5.00% 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 20-Year 3.750% 7.219 6.677 6.177 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231