A manufacturer is considering two alternative machine replacements. Machine $1$ costs $$1$ million with an expected life of $5-$years and will generate after$-$tax cash flows of $$350,000$ a year. At the end of $5$ years, the salvage value on Machine $1$ is zero, but the company will be able to purchase another Machine $1$ for a cost of $$1\mathrm{.}2$ million. The replacement A manufacturer is considering two alternative machine replacements. Machine $1$ costs $$1$ million with an expected life of $5-$years and will generate after$-$tax cash flows of $$350,000$ a year. At the end of $5$ years, the salvage value on Machine $1$ is zero, but the company will be able to purchase another Machine $1$ for a cost of $$1\mathrm{.}2$ million. The replacement Machine $1$ will generate after$-$tax cash flows of $$375,000$ a year for another $5$ years. At that time its salvage value will also be zero. The manufacturer's second option is to buy Machine $2$ at a cost of $$1\mathrm{.}5$ million today. Machine $2$ will produce after$-$tax cash flows of $$400,000$ a year for $10$ years, and after $10$ years it will have an after$-$tax salvage value of $$100,000.$ The cost of capital for both machines is $12$ percent.

$1.$ What is the NPV for both machine $1$ and for machine $2?$

$2.$ Which machine will have the highest NPV for the firm?

$3.$ Please explain how the selection of the machine with the highest NPV will increase the value of the firm.

$4.$ If the manufacturer chooses the machine that adds the most value to the firm, by how much will the company's value increase?

Summarize your results in a memo to your employer, letting them know what decision you are recommending and the reason for your recommendation.