question archive Using a discount rate of 8 percent, and treating the average sales figures as annuities, rank the customers in terms of their lifetime value
Using a discount rate of 8 percent, and treating the average sales figures as annuities, rank the customers in terms of their lifetime value
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Using a discount rate of 8 percent, and treating the average sales figures as annuities, rank the customers in terms of their lifetime value. You need to show the detailed procedure when calculating NPV.
Empty Cell
Avg. Annual Sales Avg. Profit Margin Expected Lifetime
Customer A: $2,500 14 % 9 Years
Customer B: $4,000 1 3 % 7 Years
Customer C: $2,100 16 % 13 Years
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Answer:
The three customers are ranked as follows:
- customer B with an expected value of $2,707.31
- customer C with an expected value of $2,655.67
- Customer A with an expected value of $2,186.41
Customer A.
Avg. annual sales =$2,500
Avg. profit margin =14%
Avg. annual profit, a = annual sales*avg. profit margin=$2500*14%=$350
Expected lifetime, n=9 years.
Annual discount rate, i =8%=0.08
NPV
=a[(1+i)n-1/i(1+i)n
=350[(1+0.08)9-1/0.08(1+0.08)9
=$2,186.41
Customer B.
Avg. annual sales =$4,000
Avg. profit margin =13%
Avg. annual profit, a = annual sales*avg. profit margin=$4000*13%=$520
Expected lifetime, n=7 years.
Annual discount rate, i =8%=0.08
NPV
=a[(1+i)n-1/i(1+i)n
=520[(1+0.08)7-1/0.08(1+0.08)7
=$2,707.31
Customer C.
Avg. annual sales =$2,100
Avg. profit margin =16%
Avg. annual profit, a = annual sales*avg. profit margin=$2100*16%=$336
Expected lifetime, n=13 years.
Annual discount rate, i =8%=0.08
NPV
=a[(1+i)n-1/i(1+i)n
=336[(1+0.08)13-1/0.08(1+0.08)13
=$2,655.67
Ranking the customers.
- customer B with an expected value of $2,707.31
- customer C with an expected value of $2,655.67
- Customer A with an expected value of $2,186.41
