24. Darron 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 $95,000 to install, but will increase customer traffic in the store by 1,000 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 5 years. Assume a discount rate of 8 percent. The projected convenience store sales per customer and the projected profit margin for the next 5 years are as follows: Projected Convenience Store Sales Per Customer Projected Profit Margin Year 1 $5.00 20% 2 $6.50 25% 3 $8.00 30% 4 $10.00 35% $11.00 40% a. What is the NPV of the next 5 years of cash flows if Darren had four new pumps installed? b. If Darren required a payback period of 4 years, should he go ahead with the installation of the new pumps?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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Change information to 95,000 to install, but will increase customer traffic in the store by 12,000 customers per year. Assume a discount rate of 7%
24. 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 $95,000 to install,
but will increase customer traffic in the store by 1,000
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 5 years. Assume a discount
rate of 8 percent. The projected convenience store sales
per customer and the projected profit margin for the
next 5 years are as follows:
nd
w-
of
ne
cer-
es
Projected Convenience Store
Sales Per Customer
Projected Profit
Margin
Year
1
$5.00
20%
2
$6.50
25%
3
$8.00
30%
$10.00
35%
$11.00
40%
a. What is the NPV of the next 5 years of cash flows if
Darren had four new pumps installed?
b. If Darren required a payback period of 4 years, should
he
ahead with the installation of the new pumps?
go
4-
Transcribed Image Text:24. 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 $95,000 to install, but will increase customer traffic in the store by 1,000 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 5 years. Assume a discount rate of 8 percent. The projected convenience store sales per customer and the projected profit margin for the next 5 years are as follows: nd w- of ne cer- es Projected Convenience Store Sales Per Customer Projected Profit Margin Year 1 $5.00 20% 2 $6.50 25% 3 $8.00 30% $10.00 35% $11.00 40% a. What is the NPV of the next 5 years of cash flows if Darren had four new pumps installed? b. If Darren required a payback period of 4 years, should he ahead with the installation of the new pumps? go 4-
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