NPV and customer profitability, no income taxes. Christen Granite sells granite counter tops to the construction industry. Christen Granite has three customers:

Homebuilders, a small construction company that builds private luxury homes; Kitchen Constructors, a company that designs and builds kitchens for hospitals and hotels; and

$ubdivision Erectors, a construction company that builds large subdivisions in major metro suburbs. Following are Christen Granite’s revenue and cost data by customer for the year ended December 31, 2007.

Kitchen Subdivision Homebuilders Constructors Erectors Revenues Cost of goods sold Operating costs

$54,000 26,400 12,000

$390,000 216,000 90,000

$1,032,000 660,000 282,000 Operating costs include order processing, sales visits, delivery, and special delivery costs. Christen estimates that revenue and costs will increase as follows on an annual basis:
Homebuilders Kitchen Constructors Subdivision Erectors Revenues 5% 15% 8%
Cost of goods sold 4% 4% 4%
Operating costs 4% 4% 4%
Christen Granite’s required rate ofreturn is 10%. Assume that

(a) all transactions occur at end-of-period,

(b) all revenues are cash inflows, and

(c) all costs are cash outflows. Ignore income tax considerations in your analysis.
Required 1. Calculate operating income per customer for 2007 and for each year of the 2008-2012 period.
2. Christen estimates the value of each customer by calculating the customer’s projected NPV over the next five years (2008-2012). Use the operating incomes calculated above to compute the value of all three customers.
3. Recently, Kitchen Construction (KC), Christen’s most valuable customer, has been threatening to leave. Lawson Tops, Christen’s fiercest competitor, has offered KC a greater discount. KC demands a 20% discount from Christen if the latter wants to keep its business. Should Christen grant KC the 20% discount? What is the five-year value of KC after incorporating the 20% discount? What other factors should Christen consider before making a final decision?
4. What are die possible adverse effects of caving in to KC’s pressure?