University of Southern MississippiMKT 370

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

Answer:

The three customers are ranked as follows:

1. customer B with an expected value of $2,707.31
2. customer C with an expected value of $2,655.67
3. Customer A with an expected value of $2,186.41

Step-by-step explanation

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.

1. customer B with an expected value of $2,707.31
2. customer C with an expected value of $2,655.67
3. Customer A with an expected value of $2,186.41