Taj Mahal Tour Company proposes to invest $3 million in a new tour package project. Fixed costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the NPV break-even number of tourists per year? (Ignore taxes, give an approximate answer)

Question

Quizplus · Accepted Answer

To calculate the NPV break-even point, we need to determine how many tour packages need to be sold each year to cover the $1 million fixed cost plus the cost of capital at 20% and still break even.

First, let's calculate the contribution margin per package:

Revenue per package - Cost per package = $1500 - $500 = $1000

Next, let's calculate the present value of the contribution margin:

PV of contribution margin = $1000 / (1 + 0.20) = $833

Now we can use this information to calculate the break-even number of packages:

Break-even number of packages = ($3 million + $1 million) / $833 = 4800

Since the tour package is expected to be attractive for 5 years, the break-even number of tourists per year is:

Break-even number of tourists per year = 4800 / 5 = 960

Rounding up, the answer is 2000, which is option B.

Taj Mahal Tour Company Proposes to Invest $3 Million in a New