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

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