At Dive Shop Inc, regular customers place about 4.0 orders per year. These orders average $93 in retail value, and contribution margin percent is typically 41%. Acquiring a new customer costs Dive Shop about $135, and Dive Shop also spends $43 per customer per year on contests, deals, and communications to keep them coming back. Dive Shop's retention rate is 83%, and the corporate discount rate is 11%. Calculate the net present value of 1 regular customer at Dive Shop. Rounding: penny. Remember, the answer may be negative.
SHOW EVERY STEP YOU DID TO FIND ANSWER.
Calculation of One customer:
Sales $372 (93*4)
contribution $ 152.52 (372 * 41%)
Cost of Acquiring Customer $43
Net Gain from one Customer $109.52
Retention ratio (83%) $90.9016
NPV discount factor 11 % $81.8933 (90.9016/1.11)
To calculate the net present value (NPV) of 1 regular customer at Dive Shop, we need to consider the cash flows associated with that customer over a certain period, and then discount these cash flows to their present value using the corporate discount rate.
Let's break down the cash flows and calculate the NPV step by step:
Contribution Margin per Order: Contribution Margin per Order = Retail value * Contribution Margin percent Contribution Margin per Order = $93 * 0.41 = $38.13
Contribution Margin per Year (per customer): Contribution Margin per Year = Contribution Margin per Order * Number of orders per year Contribution Margin per Year = $38.13 * 4.0 = $152.52
Total Revenue per Year (per customer): Total Revenue per Year = Retail value * Number of orders per year Total Revenue per Year = $93 * 4.0 = $372
Total Costs per Year (per customer): Total Costs per Year = Acquiring cost + Communication cost Total Costs per Year = $135 + $43 = $178
Net Cash Flow per Year (per customer): Net Cash Flow per Year = Total Revenue per Year - Total Costs per Year Net Cash Flow per Year = $372 - $178 = $194
Retained Customers (83% of the customers will be retained in the next year): Retained Customers = 0.83 * 1 (for 1 regular customer) = 0.83
Cash Flow in the next year: Cash Flow in the next year = Net Cash Flow per Year * Retained Customers Cash Flow in the next year = $194 * 0.83 ≈ $160.82
Calculate NPV using the formula: NPV = (Cash Flow in the next year) / (1 + Discount Rate)
Discount Rate = 11% = 0.11 (as a decimal)
NPV = $160.82 / (1 + 0.11) NPV ≈ $144.66 (rounded to the nearest penny)
The NPV of 1 regular customer at Dive Shop is approximately $144.66 (rounded to the nearest penny).
At Dive Shop Inc, regular customers place about 4.0 orders per year. These orders average $93...
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