If rate of inflation is expected to be greater (or smaller) for some particular benefits and/or costs than for costs in general,
then the discount rate for these items should be appropriately adjusted downward (upward).
Example: Suppose in the previous example that
equipment costs are expected to increase at a
rate that is 3 percent higher than the general inflation rate, which governs maintenance costs. The discount rate applicable to
alternative C should be lowered by 3 percentage
points while neither A or B need any adjustment.
Therefore, alt. C costs are
i = 0.08 - 0.03 = 0.05, n = 10, SPPW=
0.614
P = $140,000 + $140,000
(0.614)
= $140,000 + $85,960
= $225,960, now alternative C is no longer preferable, and alternative A
again is the preferred (lowest cost)
alternative.