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 conveniens 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 14,000 customers per year. Also, because the "Gas n Go would be selling its gasoline at no profit Darm plans on increasing the profit margin on convenience store items incrementally over the next five years. Assume a discount rate of 7 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 1 2 3 Projected Convenience Store Sales Per Customer $5.50 $7 $8 $9 Projected Profit Margin 15% 25% 30% 35% a. What is the NPV of the next five years of cash flows if Darren had four new pumps installed? NPV-$13506.77 (Enter your response rounded to two decimal places) b. If Darren required a pagback period of four years, should he go ahead with the installation of the new pumps? The project should not be undertaken since the payback period is years. (Enter your response rounded to two decimal places)
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 conveniens 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 14,000 customers per year. Also, because the "Gas n Go would be selling its gasoline at no profit Darm plans on increasing the profit margin on convenience store items incrementally over the next five years. Assume a discount rate of 7 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 1 2 3 Projected Convenience Store Sales Per Customer $5.50 $7 $8 $9 Projected Profit Margin 15% 25% 30% 35% a. What is the NPV of the next five years of cash flows if Darren had four new pumps installed? NPV-$13506.77 (Enter your response rounded to two decimal places) b. If Darren required a pagback period of four years, should he go ahead with the installation of the new pumps? The project should not be undertaken since the payback period is years. (Enter your response rounded to two decimal places)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter7: Allocating Costs Of Support Departments And Joint Products
Section: Chapter Questions
Problem 17E
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Transcribed Image Text: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 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 7 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
1
2
3
4
5
Projected Convenience Store
Sales Per Customer
$4
$5.50
$7
$8
$9
Projected Profit
Margin
15%
20%
25%
30%
35%
a. What is the NPV of the next five years of cash flows if Darren had four new pumps installed?
NPV=$13506.77 (Enter your response rounded to two decimal places.)
b. If Darren required a pryback period of four years, should he go ahead with the installation of the new pumps?
The project should not be undertaken since the payback period is years. (Enter your response rounded to two decimal places)
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