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 $370,000, an annual operating cost of $135,000, and a life of 3 years. Method 2 will have an initial cost of $770,000, an operating cost of $140,000 per year, and a 6-year life. Assume 12% salvage values for both methods. Lego uses an MARR of 14% per year.

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 $370,000, an annual operating cost of $135,000, and a life of 3 years. Method 2 will have an initial cost of $770,000, an operating cost of $140,000 per year, and a 6-year life. Assume 12% salvage values for both methods. Lego uses an MARR of 14% per year.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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Required information
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 $370,000, an annual operating cost of
$135,000, and a life of 3 years. Method 2 will have an initial cost of $770,000, an operating cost of $140,000 per year, and
a 6-year life. Assume 12% salvage values for both methods. Lego uses an MARR of 14% per year.
Which method should it select on the basis of a present worth analysis?
The present worth of method 1 is $ -1,094,517 and that of method 2 is $ -782,345
Method 1
is selected.

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