The government imposes a restriction on firms such that no more than Upper Q 2 units of output can be produced so that the new s
upply curve intersects the demand curve at e 2. Discuss the effects on consumer surplus (CS), producer surplus (PS), welfare (W), and deadweight loss (DWL). As a result of the restriction, the change in consumer surplus (Upper DeltaCS) in terms of the letters given is Upper DeltaCSequals nothing. As a result of the restriction, the change in producer surplus (Upper DeltaPS) in terms of the letters given is Upper DeltaPSequals nothing The change in welfare (Upper DeltaW) in terms of the letters given is Upper DeltaWequals nothing The deadweight loss from the restriction (DWL) in terms of the letters given is DWLequals nothing
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Answer:
NPV with a 14.9% discount rate: 6,329.06
The toy should be produced as the NPV is positive.
IRR = 26.65%
Explanation:
First we calculate for the NPV using the given discount rate of 14.9%
We will calculate the present value of each year cash inflow:
Year 1 cash inflow: 47,500.00
time 1.00
rate 0.149
PV 41,340.30
Year 2 cash inflow: 18,600.00
time 2.00
rate 0.149
PV 14,088.76
Then, we add them and subtract the investment to get NPV
NPV = 14,088.76 + 41,340.3 - 49,100 = 6,329.06
The toy should be produced as the NPV is positive.
Now for the IRR
That is the rate at which NPV equals zero we can solve for this using the quadratic equation as there are only two cash flow:
Year 1 will discount at (1+IRR)
Year 2 will be discount at (1+IRR )^2
So we can express and recreate the quadratic formula:
18,600 X^2 + 47,500 X - 49,500 = 0
A = 18,600
B = 47,500
C = -49,100
We can solve and get:
x1 = 0.78957
x2 = -3.3433
We take the positive value.
and now solve for IRR
IRR = 0,2665121 = 26.65%
This will be the IRR for the project.