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Check out fiber cement siding. After studying siding options for some modular buildings we put in here at the landfill, we went with fiber cement. Looks like real wood, doesnt burn, warp or crack. It's a little more expensive but a lot more trouble free in the long run.
The only problem with cedar siding is the cost - I had to buy some for patching on older home and 6" siding was a $1.00 a running foot (not a board foot). I'm sure it has gone up since then. One of the nasties jobs I got involved in was pulling sodong off a house, numbering it, run it through and planer, then nailed it back onto the house. The guy couldn't locate enough traditional 6" siding to do his house. Looked like a million buck when he was done - but that's about what it would have costed using a contractor instead of buddies working for beer.
I too would remove all the old siding before installing vinyl, make it easier to find the studs when hanging and it exposes any problems (rotted windows and sheeting). Also if you leave the old siding on your windows and doors look "sunken" into the siding.