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28 October, 18:33

Tire manufacturer Firebridge sells tires to retail firm A. Average annual sales for firm A is $55,000. Average profit margin is 15%. The expected lifetime is 10 years. Using a discount rate of 15 percent, calculate the Customer Lifetime Value of firm A and choose the closest answer below: 1) $5,500 2) $38,590 3) $41,405 4) $25,675

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  1. 28 October, 19:02
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    The Customer Lifetime Value of firm A amounts to $41,405. Hence, the correct option is 3

    Explanation:

    The formula to compute the Customer Lifetime Value of firm A is:

    Customer Lifetime Value of firm A = Average annual sales * Average Profit Margin * Uniform series PW (Present Worth) factor

    = $55,000 * 15% * 5.0188

    = $41,405

    where

    Average annual sales is $55,000

    Average Profit Margin is 15%

    We need to find out this:

    The formula to compute this:

    Uniform series PW factor = (1 + i%) ^ n - 1 / i % * (1 + i%) ^ n

    = (1 + 15%) ^ 10 - 1 / 15% * (1 + 15%) ^ 10

    = (1.15 ^ 10 - 1) / (0.15 * 1.15 ^10)

    = 5.0188
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