the first year of production, a competitive firm

the first year of production, a competitive firm

For the first year of production, a competitive firm has total cost given by, TC(Q) = 5 million +5Q +Q2 /10,000 where Q represents “quantity per year”. Assume that during the first year, the market price is 80, and whatever the firm produces is sold in bulk at the beginning of the year and the price is collected and costs are disbursed at that time. In the second year, firm’s total cost will be TC(Q)= $5Million+4Q +Q2 /12,000 if the firm again buys the same machine/factory space etc. as it did in the first year but also buys an additional machine whose payment will be made in three installments of $500K/year beginning at the beginning of third year. Price stays the same in the second year and, again firm sells its total production in bulk at the beginning of the second year and collects the price and disburses the $5M as well as the variable costs at that time. What is the IRR of the additional machine?


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