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Discussion

Raising the discount rate in a present worth comparison tends to favour the alternative with

  • A.the larger salvage value
  • B.lower first cost and higher operating cost
  • C.higher first cost and lower operating cost
  • D.the longer life

Answer: B

A high rate penalises distant cash flows, so the alternative whose burden lies in the future is treated more leniently and the capital-intensive one loses its advantage. The ranking can reverse at some rate, which is the crossover point.

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