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However the PCSO says you must choose from only two option
as a lump sum today, but accept only P 17 million. OPTION B is you get all “P 30 million” but 15 e
over the next 15 years.
a. On a pure NPV basis, which would you take, the lump sum or the “15 gives?” (Assume your dis
b. On a pure NPV basis, at what discount rate are the lump sum and the “15 gives” the same NPV?
a. What other non-NPV issues might you consider in taking the lump sum vs. taking the 15 gives?
because you have an operation; etc.)
Year 1 2 3 4 5 6 7 8 9
Amount 2 2 2 2 2 2 2 2 2
discount factor 0.952381 0.907029 0.863838 0.822702 0.783526 0.746215 0.710681 0.676839 0.644609
DCF 1.904762 1.814059 1.727675 1.645405 1.567052 1.492431 1.421363 1.353679 1.289218
NPV ₱20.76
5%
Instant cash of lump sum 17 million.
Its better to accept the cash in 15 installments as the total value of money received will be greater then 17 million instant cash
b)
by trial an error r=6%
Year 1 2 3 4 5 6 7 8 9
Amount 2 2 2 2 2 2 2 2 2
discount factor 0.943396 0.889996 0.839619 0.792094 0.747258 0.704961 0.665057 0.627412 0.591898
DCF 1.886792 1.779993 1.679239 1.584187 1.494516 1.409921 1.330114 1.254825 1.183797
R=7
Year 1 2 3 4 5 6 7 8 9
Amount 2 2 2 2 2 2 2 2 2
discount factor 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.62275 0.582009 0.543934
DCF 1.869159 1.746877 1.632596 1.52579 1.425972 1.332684 1.245499 1.164018 1.087867
r=8
Year 1 2 3 4 5 6 7 8 9
Amount 2 2 2 2 2 2 2 2 2
discount factor 0.925926 0.857339 0.793832 0.73503 0.680583 0.63017 0.58349 0.540269 0.500249
DCF 1.851852 1.714678 1.587664 1.47006 1.361166 1.260339 1.166981 1.080538 1.000498
r=8.1
Year 1 2 3 4 5 6 7 8 9
Amount 2 2 2 2 2 2 2 2 2
discount factor 0.924214 0.855753 0.791631 0.732314 0.677441 0.62668 0.579722 0.536284 0.496099
DCF 1.848429 1.711507 1.583262 1.464628 1.354882 1.25336 1.159445 1.072567 0.992199
c)
from only two options: OPTION A, get all the cash
30 million” but 15 equal payments of P 2 M a year,
?” (Assume your discount rate is 5%)
ves” the same NPV?
aking the 15 gives? (e.g. you need the money now
10 11 12 13 14 15
2 2 2 2 2 2
0.613913 0.584679 0.556837 0.530321 0.505067953 0.481017
1.227827 1.169359 1.113675 1.060643 1.010135906 0.962034 20.75932
10 11 12 13 14 15
2 2 2 2 2 2
0.558395 0.526788 0.496969 0.468839 0.442300964 0.417265
1.11679 1.053575 0.993939 0.937678 0.884601929 0.83453 19.4245
10 11 12 13 14 15
2 2 2 2 2 2
0.508349 0.475093 0.444012 0.414964 0.387817241 0.362446
1.016699 0.950186 0.888024 0.829929 0.775634482 0.724892 18.21583
10 11 12 13 14 15
2 2 2 2 2 2
0.463193 0.428883 0.397114 0.367698 0.340461041 0.315242
0.926387 0.857766 0.794228 0.735396 0.680922083 0.630483 17.11896
10 11 12 13 14 15
2 2 2 2 2 2
0.458926 0.424539 0.392728 0.3633 0.336078155 0.310896
0.917853 0.849078 0.785456 0.726601 0.67215631 0.621791 17.01321
2. A cable TV company has information about an “average” premium customer.
m 6000
L 10 years
AC 7000 (for free cable box) + installation fees
CR 0.1
RR 0.9
.09 (or
i 9%)
You can solve this problem using a spreadsheet, or by using the formulas in the note.
what are the simple CLV, CLV with churn, and CLV with churn and time value?
I can give a special gadget to the customer worth P 12,000, but only if he will give me an extra P
2,000 per year in extra margin. Does this offer make sense? (Hint: add the new offer to m and AC.
How does it impact CLV?)
A. CLV with churn rate (retention rate) and time value of money
CLV = m * 27421.05
– AC
m 8000
L 10
AC 19000
CR 0.1
RR 0.9
i 0.09 (or 9%)
A. CLV with churn rate (retention rate) and time value of money
CLV = m * 26894.74
– AC
n the note.
will give me an extra P
new offer to m and AC.
3. A bank's customer profitability is based on a.) balances—the more, better, since the bank can use t
m 42,000
based on P 150,000 in combined savings and checking balances (margin = 3%)
+ interest income from a P 750,000 car loan (margin = 7%) = 57,000
minus cost of servicing the customer—branches, labor,
L 12.5 years
AC 17,000 (marketing, promotions, gifts)
CR 0.08
RR 0.92
i 0.06 (or 6%)
Again, you can use a spreadsheet or the quick formulas in the note.
What is the CLV with time value and churn for a typical customer?
a.
A private banking customer keeps a deposit of P 50 million. But the customer
b. will not keep all 50 million in savings—the bank must invest most of the
customer’s money in various equities, bonds. The
b.
ce the bank can use the money b.) the number of times the customer uses services—the fewer times, better c)