Company XYZ has just taken up new office space and is considering making some leasehold improvements which will cost $100,000. Leasehold improvements can be amortized on a straight line basis over the life of the lease (ten years) for both income tax and financial reporting purposes. These improvements should increase efficiency and result in increased operational cash flow (excluding depreciation) of $18,000 each of the 10 years. In addition, the lessor has agreed to pay them $13,000 to retain certain fixtures at the end of the lease. Their tax rate is 30% and their required discount rate (cost of capital) is 12%.
a) What is the net present value of the incremental cashflow? Should they proceed?
b) What is the internal rate of return?

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The Answer of Company XYZ has just taken up new office space and is considering making some leasehold improvements which will cost $100,000. Leasehold improvements can be amortized on a straight line basis over the life of the lease (ten years) for both income tax and financial reporting purposes. These improvements should increase efficiency and result in increased operational cash flow (excluding depreciation) of $18,000 each of the 10 years. In addition, the lessor has agreed to pay them $13,000 to retain certain fixtures at the end of the lease. Their tax rate is 30% and their required discount rate (cost of capital) is 12%.
a) What is the net present value of the incremental cashflow? Should they proceed?
b) What is the internal rate of return?

Company XYZ Has Just Taken Up New Office Space and Is