Net of Acquisition Costs and Annual Discount Rate Questions

Question 1. AOL bought customers from CD Now for $60 per customer. CD Now’s annual retention rate was 60 percent, and customers generated $15 of profit per year. Assuming an annual discount rate of 12 percent, evaluate AOL’s purchase of CD Now customers.

Question 2. It costs Ameritrade $203 to acquire a customer. Ameritrade earned $200 per year from a customer and had an annual retention rate of 95 percent. Assuming cash flows are discounted at 12 percent, estimate the value of a customer and the net of acquisition costs.

Question 3. Assume the annual retention rate for a cell phone subscriber is 70 percent and the customer generates $300 per year in profit. Assuming an annual discount rate of 8 percent, compute the value of a customer.

Question 4. Each year Capital Two retains 75 percent of its customers, and the annual discount is 5 percent. What annual retention rate doubles the value of a customer?

Question 5. Assume a customer has been with a company for 10 years and has made purchases at times .2, 1.2, .8, and 3. Estimate the probability the customer is still alive.

Put all the answers in one Excel file that includes five worksheets (one worksheet for one question). Label the worksheets properly.

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