Lego Group in Bellund, Denmark manufactures Lego toy construction blocks. The company is considering two methods for producing special-purpose Lego parts. Method 1 will have an initial cost of $400,000, an annual operating cost of $140,000, and a life of 3 years. Method 2 will have an initial cost of $600,000, an operating cost of $100,000 per year, and a 6-year life. Assume 10% salvage values for both methods. Lego uses an MARR of 15% per year. (a) Which method should it select on the basis of a present worth analysis? (b) If the evaluation is incorrectly performed using the respective life estimates of 3 and 6 years, will Lego make a correct or incorrect economic decision? Explain your answer.

Question

Lego Group in Bellund, Denmark manufactures
Lego toy construction blocks. The company is considering
two methods for producing special-purpose
Lego parts. Method 1 will have an initial cost of
$400,000, an annual operating cost of $140,000, and
a life of 3 years. Method 2 will have an initial cost of
$600,000, an operating cost of $100,000 per year,
and a 6-year life. Assume 10% salvage values for
both methods. Lego uses an MARR of 15% per year.
(a) Which method should it select on the basis of a
present worth analysis? (b) If the evaluation is incorrectly
performed using the respective life estimates
of 3 and 6 years, will Lego make a correct or incorrect
economic decision? Explain your answer.

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