Chapter 4, Problem 24P

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:

1. What is the NPV of the next 5 years of cash flows if Darren had four new pumps installed?
2. If Darren required a payback period of 4 years, should he go ahead with the installation of the new pumps?