r = discount rate C = net cash flow (the profit) at time t (The initial cost of ac- quiring a customer would be a negative net cash flow at time 0.) How much are you worth to a given company if you continue to purchase its brand for the rest of your life? Many marketers are grappling with that question, but it's not easy to determine how much a customer is worth to a company over his or her lifetime. Calculating customer lifetime value can be very com- plicated. Intuitively, however, it can be a fairly simple net pres- ent value calculation, which incorporates the concept of the time value of money. To determine a basic customer lifetime value, each stream of profit (C, the net cash flow after costs are subtracted) is discounted back to its present value (PV) and then summed. The basic equation for calculating net present value (NPV) is: NPV can be calculated easily on most financial calculators or by using one of the calculators available on the Internet, such as the one found at www.investopedia.com/calculator/ NetPresent Value.aspx. 1-13. Assumethatacustomershopsatalocal grocery storespend- ing an average of $200 a week, resulting in a retailer prof- it of $10 each week from this customer. Assuming the shopper visits the store all 52 weeks of the year, calculate the customer lifetime value if this shopper remains loyal over a 10-year life span. Also assume a 5 percent annual interest rate and no initial cost to acquire the customer. C NPV = =0 (1 + r) Where, t = time of the cash flow N = total customer lifetime

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter18: Cost-volume-profit Analysis (cvp)

Section: Chapter Questions

Problem 3R: Based on Poleskis current situation, will it earn its target net income? If not, how many units need...

See similar textbooks

Related questions

Concept explainers

Question

Transcribed Image Text:r = discount rate C = net cash flow (the profit) at time t (The initial cost of ac- quiring a customer would be a negative net cash flow at time 0.) How much are you worth to a given company if you continue to purchase its brand for the rest of your life? Many marketers are grappling with that question, but it's not easy to determine how much a customer is worth to a company over his or her lifetime. Calculating customer lifetime value can be very com- plicated. Intuitively, however, it can be a fairly simple net pres- ent value calculation, which incorporates the concept of the time value of money. To determine a basic customer lifetime value, each stream of profit (C, the net cash flow after costs are subtracted) is discounted back to its present value (PV) and then summed. The basic equation for calculating net present value (NPV) is: NPV can be calculated easily on most financial calculators or by using one of the calculators available on the Internet, such as the one found at www.investopedia.com/calculator/ NetPresent Value.aspx. 1-13. Assumethatacustomershopsatalocal grocery storespend- ing an average of $200 a week, resulting in a retailer prof- it of $10 each week from this customer. Assuming the shopper visits the store all 52 weeks of the year, calculate the customer lifetime value if this shopper remains loyal over a 10-year life span. Also assume a 5 percent annual interest rate and no initial cost to acquire the customer. C NPV = =0 (1 + r) Where, t = time of the cash flow N = total customer lifetime

Expert Solution

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.