A unit within a company wants to start a project that will initially make heavy usage of an existing machine. If the project does not start, the machine is scheduled to be replaced at the end of year 6. However, if the project starts, then due to the heavy initial usage, the machine has to be replaced at the end of year 4. Regardless of when machine is replaced and whether the project starts or not, any replaced machine is expected to last 7 years. The firm will keep replacing the machine (forever) each time at the end of its life. The machine cost is fixed (forever) and the appropriate discount rate is 10% per annum.

a) If the cost of using excess capacity that should be charged to the project is 200000 then find the fixed machine cost.

b) Assume that instead of year 4, the machine has to be replaced at the end of year 5 if the project starts. If the fixed machine cost is 1000000 then what is the cost of excess capacity?