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

Fig: 1