A museum is planning to add a new virtual tour application. The cost to purchase/build this application will be $900,000 and cost $130,000 in maintenance every semester. Furthermore, they need to invest in special equipment to facilitate virtual visitors. The total cost of equipment will be $150,000. The museum also needs to assign staff to organize these virtual events. The salary of the staff is $200,000 every semester. After every two years of operation, the application needs to be updated and the equipment needs to be updated for a cost of $80,000. During this remodeling, the tour will be unavailable to visitors for 3 months. The application will be operational for a total of 10 years. After that, it will be considered obsolete, and its estimated salvage value will be $600,000. The salvage value for the equipment will be half the purchasing price.

The management of the observatory estimates that the application will attract 6,000 people in the first three months of operation, and this demand will grow by 3% every three months. During the major upgrades, there will be no growth in demand and after the tours restart, the number of visitors will be the same as before the upgrade. There is one period of pause in demand growth because of the upgrade and the next increase in visitors will happen after three months. The marketing manager is considering starting with a ticket price per visitor of $7.50; however, this ticket price will decrease after 5 years as people might prefer in-person visits. The strategy is to keep ticket prices at $7.50 for the first 5 years then reduce it by $0.75 every year. The interest rate is 7% per year compounded monthly. The revenues obtained from tickets will be available to Museum every three months.

Can use excel

1. Draw the cash-flow diagram.

2. What is the benefit (in today's $$) of this investment?

3. What is the cost of this museum to LA county (in today's $$)?

4. Determine the benefit-cost ratio. Should the Los Angeles County Museum Management pursue this investment?

5. What would be the minimum required initial ticket price per visitor such that the investment can just break even?