Question

Darren Mack owns the "Gas n' Go" convenience store and gas station. After hearing a marketing lecture, he realizes that it might be possible to draw more customers to his high-margin convenience store by selling his gasoline at a lower price. However, the "Gas n' Go' is unable to qualify for volume discounts on its gasoline purchases, and therefore cannot sell gasoline for profit if the price is lowered. Each new pump will cost $150,000 to install, but will increase customer traffic in the store by 14,000 customers per year. Also, because the "Gas n' Go" would be selling its gasoline at no profit, Darren plans on increasing the profit margin on convenience store items incrementally over the next five years. Assume a discount rate of 8 percent. The projected convenience store sales per customer and the projected profit margin for the next five years are given in the table below.

Year Projected Convenience Store Sales Per Customer Projected Profit Margin 1 $6 20 % 2 $7.50 25 % 3 $9 30 % 4 $11 35 % 5 $12 40 % a. What is the NPV of the next five years of cash flows if Darren had four new pumps installed? NPVequals $ nothing. (Enter your response rounded to two decimal places. )

Answer 1

Above is the calculation for each year's Cash inflow calculated as (Number of Customers per year * Projected profit Margin * Projected Convenience store sales per customer)

Initial investement = 150000*4

= $ 600,000

discount rate is fiven to be (d) = 8%

NPV = $ 982,355.80