Question

Identify, from media reports on Australian industry, an example of a firm that has significant monopoly power. identify the inefficiencies in outcomes that arise, or would arise, if the firm was free to exercise that power. Finally, explain how government intervention is used, or may be used, to curb that power and provide a more efficient outcome for the economy.

Answer 1

NOTE: All the values in dollars

1. After tax cash flows will be the following

PAT	Year
-56000	0
3609410	1
3000001.2	2
2675122.128	3
2585922.498	4
2691945.395	5

Working notes:-

2. NPV =

Inflows1Quantity sold 72000 276 43200 2160 41040 5832052488 2 Price 3 Actual qty Sold (60% of qty sold expected) 4 Product returns 5 total qty sold (3-4) 6 Revenue (5x2) 0 0 0 0 0 253.92 233.6064 214.9179 34992 31492.8 1749.61574.64 33242.4 29918.16 13680000 11327040 9378789.12 7765637 6429948 13856300 11485716 9521603.04 7894175 6545636 2400 36936 Total OutflowsR& D 80,000 0 0 0 0 0 Machinery Cost Marketing cost 7500000 6000000 4500000 3000000 1500000 1200000 1200000 12000001200000 1200000 80,000 8,700,000 7,200,000 5,700,000 4,200,000 2,700,000 Total Gross profit Profit after tax 80,000 5,156,300 4,285,716 3,821,603 3,694,175 3,845,636 56000 3609410 3000001.2 2675122.128 2585922 2691945

8062482

Working notes:

Inflows1Quantity sold 0 5832052488 2 Price 3 Actual qty Sold (60% of qty sold expected) 4 Product returns 5 total qty sold (3-4) 6 Revenue (5x2) 276 43200 2160 41040 0 300 253.92 233.6064 214.9179 34992 31492.8 1749.61574.64 33242.4 29918.16 13680000 11327040 9378789.12 7765637 6429948 13856300 11485716 9521603.04 7894175 6545636 0 0 0 2400 36936 Total & D Machinery Cost Marketing cost OutflowsR 80,000 0 0 0 0 0 7500000 6000000 4500000 3000000 1500000 1200000 1200000 12000001200000 1200000 80,000 8,700,000 7,200,000 5,700,000 4,200,000 2,700,000 Total Gross profit Profit after tax PV of Cashflows 80,000 5,156,300 4,285,716 3,821,603 3,694,175 3,845,636 56000 3609410 3000001.2 2675122.128 2585922 2691945 56000 2887528 1920000.8 1369662.53 1059194 882096.7 NPV 8062482

3. Payback period = 2.03 years

5. yes, it is a viable project.