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 gas at a lower price. However, the Gas n’ Go is unable to qualify for volume discounts on its gas purchases, and therefore, cannot sell gas 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 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 5 years. Assume a discount rate of 7%. The projected convenience store sales per customer and the projected profit margin for the next 5 years are as follows: Year Projected Convenience Store Sales Per Customer Projected Profit Ma
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 gas at a lower price. However, the Gas n’ Go is unable to qualify for volume discounts on its gas purchases, and therefore, cannot sell gas 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 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 5 years. Assume a discount rate of 7%. The projected convenience store sales per customer and the projected profit margin for the next 5 years are as follows:
|
Year |
Projected Convenience Store Sales Per Customer |
Projected Profit Margin |
|
1 |
$5.00 |
20% |
|
2 |
$6.50 |
25% |
|
3 |
$8.00 |
30% |
|
4 |
$10.00 |
35% |
|
5 |
$11.00 |
40% |
- What is the
NPV of the next 5-years of cash flow if Darren had 4 new pumps installed? - If Darren required a payback period of 5 years, should he go ahead with the installation of the new pumps?
- Show breakdown of work
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