Problem 1. Commercial Baking. David Easton runs a small commercial baking business. He faces a cost of capital at 12% per year. He is considering an investment in one of two potential target markets for his baking business. a) Target Coffee Shops. This approach will require spending $6,000 on a one time advertising campaign with salesperson visits to build awareness among the shops. He expects that if he does this he will sign up 58 coffee shops to buy his muffins, croissants, and bagels. He expects that for each shop he sell fiftytwo large trays per year of assorted goods at a price of $48.00 per tray. David's cost per large tray (including delivery) runs at $18.00. He expects a retention rate of 72%. i) What is the gross lifetime value of a single newly acquired coffee shop (before taking into account the any acquisition cost)? ii) What is the total net lifetime value of all of the coffee shops (after taking into account the $6000 cost of acquisition of these shops)? b) Target Office Coffee Rooms. This approach will require spending of $12,000 on a one time salesforce campaign to visit and build awareness among office managers. He expects that if he does this he will sign up 180 offices. For each office he will sell forty small trays per year of assorted goods at a price of $30.00 dollars per tray. David's cost per small tray (including delivery) runs at $12.00. He expects a retention rate of 41%. i) What is the gross lifetime value of a single newly acquired local office (before taking into account any acquisition costs)? ii) What is the total net lifetime value (after taking into account the $12,000 cost of acquisition of these offices) of all ofthe local offices? Problem 2. T-Mobile. Wireless service carriers typically pay large subsidies to acquire customers. This results in industry wide average acquisition costs of $310. Industry figures suggest the average carrier earns $55 per month in revenues. Margins in the industry average 30%. Although some carriers have offered plans without contracts, post-paid plans with contracts have been the norm in the industry. Contracts tend to extend the life of a customer. On average, the expected life of a customer under the contract model is 4 years. Without a contract, the expected life drops by 50% (HINT: In the reading on customer management and the notes we explored the relationship between expected life and retention rate). Recently, T-Mobile has begun advertising no annual service contracts. a) Under the current industry economics (i.e. assuming costs, revenues, and margins are unchanged), what is the effect of eliminating contracts on the net lifetime value of a customer (assuming an annual discount rate of 10%)? b) What advice would you give T-Mobile as they transition to no contracts