Discussion
Consider the following statements about cost estimation:
1. The Lang factor scales equipment cost to fixed capital investment.
2. The six-tenths rule scales cost between capacities.
3. Payback period accounts for the time value of money.
Which of the statements given above is or are correct?
Answer: D
Correct answer: 1 and 2 only
Statements 1 and 2 describe the two scaling tools correctly. Statement 3 is false: payback uses undiscounted cash flows and takes no account of the time value of money - which, with its blindness to everything after the payback point, is its central weakness.
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