Darren Mack owns the \'\'Gas n? Go\'\' convenience store and gas station. After
ID: 2446690 • Letter: D
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 $70.000 to install, but will increase customer traffic in the store by 12,000 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 9 percent. The projected convenience store sales per customer and the projected profit margin for the next five years are given in the table below. a. What is the NPV of the next five years of cash flows if Darren had four new pumps installed? NPV = (Enter your response rounded to two decimal places.)Explanation / Answer
PV Cash outflow = Four pumps installed = $70000 * 4 pumps = $280000
PV of cash inflow - increase in customer by 12000 per year
Year 1 = (12000*4pumps) *4 * 15% = 28800 * 0.917431192 = $26422.01832
Year 2 = 48000 * 4.50 * 20% * 0.841679992 = $36360.57565
Year 3 = 48000 * 6 * 25% * 0.772183478 = $55597.21041
Year 4 = 48000 * 7 * 30% * 0.708425209 = $71409.26106
Year 5 = 48000 * 9 * 35% * 0.649931384 = $98269.62526
Total PV of cash inflow = $288058.6905
NPV = $288058.6905 - $280000 = $8058.6905
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