Your friend has put you in a very bad position because you both want the same position. You probably know already that a real friend would not act this way.
If you do not apply for this job, you are being totally unfair to yourself. In the first place, you will be losing a career opportunity that you want. You have most likely worked hard to this point, and if you do not apply for this promotion, then what was the point of all that work?
Secondly, if you do not apply for this position, you will lose stature in the eyes of your manager who suggested that you apply in the first place. If he sees you walk away from a chance to advance, he will certainly think twice about promoting you in the future.
If you want this position, go for it. Your friend should do likewise. No matter what the outcome may be, if you have a real friendship, it will survive.
If you do not apply and your friend gets the promotion, how are you going to feel when you report to her? Ironically enough, your friendship is actually less likely to survive if you give up this chance to be promoted.
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