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 in-
crementally over the next five years. Assume a discount rate
of 8 percent. The projected convenience store sales per cus-
tomer and the projected profit margin for the next five years
are as follows:
a. What is the NPV of the next five years of cash flows if
Darren had four new pumps installed?
b. If Darren required a payback period of four years, should
he go ahead with the installation of the new pumps?
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