Example:

Example:

a. What is the NPV of the next five years of cash flows if Darren had five new pumps installed? First compute cash flows. Now calculate the net present value. The net present value of the purchase is calculated as the sum of discounted future savings from the purchase less the cost of the purchase. NPV=425,000+1.0739,375+(1,07)275,000+(1.07)3106,875+(1.07)4144,375+(1.07)5195,000=$13,724,10 b. If Darren required a payback period of four years, should he go ahead with the installation of the new pumps? Compute the incremental cash flows only during the first four years. 1.0739,375+(1.07)275,000+(1.07)3106,875+(1.07)4144,375=$299,691.80 Additional cash flows of $425,000=$299,691,80=$125,308,20 require additional 125,303,20/139,032.30=0.901 years of operation. Hence, the payback occurs at about 4.901 years. Since the payback period is longer than 4 years, it does not meet Darren's threshold. Thus, the project should not be undertaken. a. What is the NPV of the next five years of cash flows if Darren had five new pumps installed? First compute cash flows. Now calculate the net present value. The net present value of the purchase is calculated as the sum of discounted future savings from the purchase less the cost of the purchase. NPV=425,000+1.0739,375+(1.07)275,000+(1.07)3106,875+(1.07)4144,375+(1.07)5195,000=$13,724,10 b. If Darren required a payback period of four years, should he go ahead with the installation of the new pumps? Compute the incremental cash fows only during the first four years. 1.0739,375+(1.07)275,000+(1.07)3106,875+(1.07)4144,375=$299,691,80 Additional cash flows of $425,000$299,691,80=$125,308.20 require additional 125,308.20/139,032.30=0.901 years of operation. Hence, the payback occurs at about 4.901 years. Since the paybock, period is longer than 4 years, it does not meet Darren's threshold. Thus, the project should not be undertaken. 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 $85,000 to install, but will increase customer traffic in the store by 7,500 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 8 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. a. What is the NPV of the next five years of cash flows if Darren had five new pumps installed? First compute cash frews Gtore by sek owns the "Gas n' Go" convenience store and gas station. After hearing a marketing lecture, he realizes that it might be possbile bo draw more customers to his high-margh conven ence store by Each new pump wil cont $110,000 to inatalt, but wal increase custemer traffic in the store by 10,000 customers per year. Also, because the "Gas n Go" would be seling ki gasoline at no prott. customer and the projected proble margin for the next five years are given in the table below 2. What is the NPV of the next five years of cash flows 1 Darren had four new pumps instaled? NPV=1 (Enter your response rounded to two docimal placess) 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 solling 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 $85,000 to instal, but will increase customer trafic in the store by 7,500 customers per year. Ass, 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 percont. The projected convenience store sales per customer and the projected profit margin for the next five years are given in the table below. a. What is the NPV of the next five years of cash flows if Darren had five new pumps installed? First compute cash flows