Answer:
a. The customer lifetime value=$10,956.77
b. The customer yields $1,560 per year in profits for this retailer
Explanation:
a.
In order to calculate the customers life-time value, the net present flow is determined from all the future profit cash flows profits. This can be expressed as;
NPV= R/(1+r)^t
where;
NPV=net present value
R=net cash flow during a certain period
r=annual interest rate
t=period
In our case;
NPV=unknown
R=profits per year=profit per week×number of weeks=$30×52=$1,560
r=7%=7/100=0.07
t=varies from 0 to 10 years
Consider the table below;
Year Future cash flows Net present value
1 1560 1560/{(1+0.07)^1}=1,457.94
2 1560 1560/{(1+0.07)^2}=1,362.56
3 1560 1560/{(1+0.07)^3}=1,273.42
4 1560 1560/{(1+0.07)^4}=1,190.12
5 1560 1560/{(1+0.07)^5}=1,112.26
6 1560 1560/{(1+0.07)^6}=1,039.49
7 1560 1560/{(1+0.07)^7}=971.49
8 1560 1560/{(1+0.07)^8}=907.93
9 1560 1560/{(1+0.07)^9}=848.54
10 1560 1560/{(1+0.07)^10}=793.02
Total NPV= 1,457.94+1,362.56+1,273.42+1,190.12+1,112.26+1,039.49+971.49+907.93+
848.54+793.02=$10,956.77
The customer lifetime value=$10,956.77
b.
The Profit yields per year can be determined using the expression below;
P=p×n
where;
P=annual profits
p=profits per week
n=number of weeks in a year
In our case;
P=unknown
p=$30
n=52 weeks
replacing;
P=30×52=$1,560 per year
The customer yields $1,560 per year in profits for this retailer
