The .scal year of McMaster Corporation of Canada has just ended. The weighted

average cost of capital of the company is 10%; and its tax rate is 25%: The company has

budgeted $50; 000 for the purchase of new machines for improving its operational e ciency.

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Two options are available. They are equally e.ective for improving the company.s operational

e ciency.

Option A is to purchase from manufacturer A a machine that belongs to an asset class with a

30% capital allowance (CCA) rate for $50; 000: The machine has a 8-year full warranty, and

manufacturer A o.ers to buy back the machine 8 years from now for $5; 000:

Option B is to purchase from manufacturer B a primary machine for $30; 000 and an auxiliary

machine for $20; 000: The primary machine belongs to the same asset class as the machine

in option A. The auxiliary machine belongs to an asset class with a 20% CCA rate. Each

machine also has a 8-year full warranty, and manufacturer B o.ers to buy back each machine

8 years from now for $2; 000:

Regardless of which option to take, there will still be assets in the two asset classes after the

disposition of the machine(s) 8 year from now, and no acquisition of assets for the two asset

classes in the same year of disposition is expected. Perform an incremental analysis, to

compare the two options, with option A being the reference. Which option is better?