Question $1(20$ points$)$:

Two used engines are not utilized in an airline's fleet, but instead, are being leased to another company for average annual end of year income totaling $\backslash (\backslash$$ $400,000\backslash )$ for both engines. Average annual operating costs to maintain both engines total $\backslash (\backslash$$ $100,000\backslash )$ per year. These numbers are believed to be sustainable for the next two years, after which, a total modification cost of $\backslash$$$250,000$ for both engines will be required $($assume an end of year $2$ cost$).$ This modification will allow the engines to generate total lease income of $\backslash (\backslash$$ $500,000\backslash )$ per year for the next $3$ years $($end of years $3,4,\backslash$& $5).$ Assume total operating costs will be $\backslash (\backslash$$ $100,000\backslash )$ in each of those years. To simplify the analysis, assume the engines will be scrapped for spare parts totaling $\backslash$$$200,000$ at the end of year $5.$ The company is considering selling the engines for $\backslash (\backslash$$ $1,200,000\backslash )$ today. For a minimum rate of return of $\backslash (12\backslash \%\backslash ),$ would you recommend selling or keeping the engines and leasing them for the next $5$ years?