Fresh Flour Makes Baking Flour and Sells Its Flour in 4

question 63

Multiple Choice

Fresh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the net present value of the equipment?

• A)- $45,852
• B)$31,520
• C)$29,926
• D)- $28,126

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Definitions:

Headright System

A land grant program designed to attract settlers by offering them a certain amount of land for each individual or head they brought to the colony.

Wealthy Gentry

A class of wealthy landowners who typically held significant social, economic, and political power in their regions.

House of Burgesses

The first legislative assembly of elected representatives in North America, established by the Virginia Company in what is now the United States.

Landed Gentry

A traditionally British social class consisting of landowners who could live entirely from rental income, often involved in the rural community and holding a significant social status.