Discussion
Put the steps of a present worth comparison in order.
1. Discount each alternative's cash flows at the chosen rate 2. Establish a common study period 3. Select the alternative with the greatest present worth 4. Set the minimum attractive rate of return
Answer: C
Correct answer: 4, 2, 1, 3
The rate comes first because nothing can be discounted without it; the study period comes next because it decides which cash flows are included; only then can the discounting be done and the alternatives ranked. Discounting before the horizon is settled is the common way of arriving at an incomparable pair of figures.
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