question archive As the manager of credit card services at Bank of Hanover (BOH), you're aware that the average profitability of a credit card customer grows with the number of years they have used the credit card
As the manager of credit card services at Bank of Hanover (BOH), you're aware that the average profitability of a credit card customer grows with the number of years they have used the credit card
Subject:BusinessPrice: Bought3
As the manager of credit card services at Bank of Hanover (BOH), you're aware that the average profitability of a credit card customer grows with the number of years they have used the credit card. Two probabilistic factors affect actual profitability. The mean profitability function is given in the table below, which has been gathered from data on BOH customers. The actual profit in a given year follows a normal distribution, with a standard deviation equal to 25 percent of the mean profit.In addition, there is a probability less than one that a customer will continue to use the card during year t. This probability is sometimes called the retention rate. For instance, an 80 percent retention rate means that, during any year, there is a 20 percent chance the customer will cancel their credit card. Assume that if a customer cancels during year t, then the cancellation occurs at the end of the year, and BOH still gets profits from year t. The current retention rate has been estimated at 80 percent.BOH uses a discount rate of 10 percent for calculating net present values.
