Discussion
If that project's discount rate rises to 12 per cent, the capital recovery factor becomes 0.13388 and the ratio falls to about
Answer: C
Correct answer: 0.93
\[ \mathrm{annual\ cost} = 2{,}000{,}000 \times 0.13388 = 267{,}760, \qquad \frac{250{,}000}{267{,}760} = 0.93. \] At 8 per cent the same project gave 1.23 and was acceptable; at 12 per cent it fails. Nothing about the project has changed - only the rate - which is why the discount rate is so often the decisive assumption.
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