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

​$95 comma 00095,000

to​ install, but will increase customer traffic in the store by

10 comma 00010,000

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.

                                                                                                     

  

LOADING...

Year	Projected Convenience Store Sales Per Customer	Projected Profit Margin
1	​$66	1515​%
2	​$7.507.50	2020​%
3	​$1010	2525​%
4	​$1212	3030​%
5	​$1313	3535​%

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

fourfour

new pumps​ installed?

NPVequals=​$nothing.

​(Enter

your response rounded to two decimal

places.​)

Answer 1

NPV = $103,333

Below are the calculations.

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