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 $500,000, an annual operating cost of $100,000, and a life of 3 years. Method 2 will have an initial cost of $700,000, an operating cost of $140,000 per year, and a 6-year life. Assume 11% salvage values for both methods. Lego uses an MARR of 14% 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.