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 $360,000, an annual operating cost of $130,000, and a life of 3 years. Method 2 will have an initial cost of $760,000, an operating cost of $130,000 per year, and a 6-year life. Assume 13% salvage values for both methods. Lego uses an MARR of 13% per year. Required:
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.

a) method 1 has a lower present worth, so it should be selected.

b) in order to properly compare both projects, we must assume that method 1 will be repeated at he end of year 3. That way both projects will have the same life span.

Explanation:

we must first determine the equivalent cash flows:

                                             method 1           method 2

initial outlay                          -360,000          -760,000

cash flow year 1                   -130,000           -130,000

cash flow year 2                  -130,000           -130,000

cash flow year 3                  -443,200          -130,000

cash flow year 4                  -130,000           -130,000

cash flow year 5                  -130,000           -130,000

cash flow year 5                   -83,200             -31,200

the present worth of method 1 = -$1,074,266

the present worth of method 2 = -$1,232,226

(75years ,i believe is the correct answer.good luck

say it in english maybe we can