Assuming that there are no forces other than gravity of Earth and the applied force (i.e. disregarding the effect of gravity due to other masses and drag), and using Newtonian mechanics, we can examine the scenario proposed by your friend with two pictures: (using $r$ to denote height of the mass)
1) Newton's Second Law
Since the a force of constant magnitude $F$ is applied, the net force acting on the mass is simply $F_n = F - mg$ away from Earth. Therefore, the equation of motion is $m \frac{dr}{dt} = F - mg$.
As you have rightly suggested, $g$ is not a constant, but varies according to Newton's Law of Gravitation $g(r) = \frac{GM}{r^2}$, which decreases as $r$ increases. Therefore, as the mass moves away from Earth, the net force acting on the mass increases, and with that the acceleration of the mass increases by Newton's second law.
There are practically no limits to how high the mass will go: mathematically from the equation of motion, $\lim_{t \rightarrow \infty} r(t) = \infty$ (if you decide to solve for the close form of $r(t)$); physically, you are essentially providing an acceleration away from Earth at every point of motion, there is practically no bound to which the mass will go.
2) Conservation of Energy
By providing a constant force $F$, you are, in energy terms, providing a work done contributing to the energy of the mass. The work done is given by $F \cdot r$, and this does not only provide energy to overcome the gravitational potential $-\frac{GMm}{r}$, but also the kinetic energy of the particle $\frac{1}{2} m \dot{r}^2$.
So part of the work done on the mass is used to provide energy for potential energy, while it also contributes to the increase in kinetic energy. As you can see here, as the mass moves further and further away from Earth, the gain in potential energy decreases (as it decrease with $\frac{1}{r}$), so higher proportion of the energy is contributed to the increase in kinetic energy, which matches the intuition we have in the force picture, where the acceleration increases as the mass moves away from Earth. Again, there are no bounds to how high the mass can travel.