Question

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 $400,000, an annual operating cost of $130,000, and a life of 3 years. Method 2 will have an initial cost of $600,000, an operating cost of $110,000 per year, and a 6-year life. Assume 13% salvage values for both methods. Lego uses an MARR of 11% per year.

Which method should it select on the basis of a present worth analysis?

The present worth of method 1 is $  and that of method 2 is $  .

Method  (Click to select)  2  1  is selected.

Answer 1

Analysis period will be 6 yrs (LCM of 3 & 6)

NPW of method 1 = -400000 -130000*(P/A,11%,6) - (400000 - 0.13*400000)*(P/F,11%,3) + 0.13*400000 * (P/F,11%,6)

= -400000 -130000*4.230538 - (400000 - 0.13*400000)*0.731191 + 0.13*400000 * 0.534641

= -1176623.07 ~ -1176623 (Nearest Dollar)

NPW of method 2 = -600000 -110000*(P/A,11%,6) + 0.13*600000 * (P/F,11%,6)

= -600000 -110000*4.230538 + 0.13*600000 * 0.534641

= -1023657.18 ~ -1023657 (Nearest Dollar)

As Present cost of method 2 is less, method 2 should be selected