A municipality is seeking a new tourist attraction, and the town council has vot

Question

A municipality is seeking a new tourist attraction, and the town council has voted to allocate $500,000 for the project. A survey shows that an interesting cave can be enlarged and developed for a contract price of $400,000. It would have an infinite life. The estimated annual expenses of operation are: Direct Labor $30,000 Maintenance 15,000 Electricity 5,000 The price per ticket is to be based upon an average of 1000 visitors per month. If money is worth 8% indefinitely, what should be the price of each ticket?

Explanation / Answer

PV of all expenses = Initial expense + other expenses / rate

                              = 400,000 + (30,000+15,000+5,000)/ 0.08

                              = $1,025,000

Annual revenue required = PV of expenses x Rate

                                        = 1,025,000 x 0.08

                                        = 82,000

Ticket price = annual revenue required/ (no. of visitors per month x12)

                    = 82,000 / (1000 x 12)

                   = 6.83 per ticket

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