Please answer Question 2

Question 1 (25 points): Suppose you need to decide whether to k eep an old machine or replace it with a new one: Old machine: The old machine can operate only until year 5 with the revenue and operating cost of S300,000 and $150,000 per year (from year 0 to year 5). The old machine will have zero salvage value at the end of year 5 New machine: If you decide to replace the old machine with a new one, it requires a capital cost of S800,000 in year zero (and zero salvage value for the old machine). Capital cost is depreciable from year 1 to year 8 (over eight years) based on MACRS 7-year life depreciation with the half year convention (table A-1 at IRS). The new machine can produce income of S375,000 with an operating cost of S100,000 per year for 8 years (from year 1 to year 8). It will have no salvage value at the end of the project life (year 8). Consider income tax of 21% and minimum rate of return 12%. Calculate the ATCF and NPV for both alternatives and conclude which alternative is more economically satisfactory? Please show your work. Question 2 (25 points): Suppose for buying the new machine in Question 1, you can lease (operating lease) the machine for !8 years with annual operating lease payments (LP) of $125,000 (from year 1 to year 8). Considering income tax of 21% and minimum ROR of 12%, calculate the ATCF and NPV of leasing the machine using this leasing agreement. Compare your result with the previous question and use NPV analysis to determine which option to choose