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

​$130,000

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

88 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	​$55	20​%
2	​$5.505.50	25​%
3	​$77	30​%
4	​$1010	35​%
5	​$1111	40​%

a. What is the NPV of the next five years of cash flows if Darren had

four new pumps​ installed?

NPVequals=​ .

​(Enter

your response rounded to two decimal

places.​)

Answer 1

Year	Store sales	profit margin	revenue generated from (14000*4pumps)56000 customers	projected margin	discount factor at 8%	present value at 8%
1	$5	20%	280,000[56000*5]	56000[280000*20%]	0.9259	51850.4[56000*0.9259]
2	$5.50	25%	308,000[56000*5.5]	77000[308000*25%]	0.8573	66012.1
3	$7	30%	392,000[56000*7]	117600[392000*30%]	0.7938	93350.88
4	$10	35%	560,000[56000*10]	196000[560000*35%]	0.7350	144060
5	$11	40%	616,000[56000*11]	246400[616000*40%]	0.6806	167699
					present value of cash flow	$522,972.38

NPV = present value of cash inflow- cash outflow

=522,972.38-[130000*4]

=2972.38$