Instructions: List your variables, write out the basic formulas, then calculate in the next step. Please fill in your answers below each question part in the document (in black font). The assignment is worth 65 points. See brackets for point values. Please submit one copy per team. I encourage you all to try the questions and compare answers. That way, you will be checking each other to make sure they are correct. If you want to do it in Excel, please label all your numbers (e.g. variable names in one row and numbers in the next row), and show your work with enough steps, so that it is easy to follow. I will check your formulas there.

Sprint charges its current customers an average of $55 per month. It costs Sprint $4.50 per month to serve these customers. It also spends $3 per customer per month to keep these customers loyal. Over the last few years Sprint has been able to retain 80% of its customers. Assume a discount rate of 5% annually.

a)Calculate Sprints customer lifetime value of its current customers. [2]

b)Sprint is willing to spend $320M in advertising to 10 million viewers, and $375M in buying out contracts for T-Mobile and AT&T customers. They expect that at least 10% of those in the targeted group will switch. In addition to cutting rates of these potential customers, leading to an average monthly price of $40 per month per customer. These customers would also pay $50 in activation fees. Calculate the CLV for these customers at the same discount rate, retention spending, and variable cost, however the retention rate is expected to be 88% for these new customers. (hint: Initial margin = activation fee) [3] CLV=Initial margin+ Mr/((1+d-r))-AC

c)What is the minimum acquisition rate they would need to achieve for this promotion to be justified (breakeven acquisition rate)? [2] Breakeven Acquisition Rate= (Acquisition Spending)/CLV

D) Assume that Sprint they fell short of the 10% goal, and got 7.5% of the targeted customers to switch, and year-to-year Sprint can increase their margins from these customers by 6%. Out of the buyout money, they paid an average of $125 in early termination fees per customer. Calculate their new CLV using the acquisition cost. (Hint: use the formula with g. AC = [advertising/number of people who switched] + average buyout cost). [3] CLV = Initial + M x r - AC (1+d-r[1+g])