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You are analyzing a potential customer service project that aims to reduce customer churn. Currently, the company has 1.2 million customers and an annual churn
You are analyzing a potential customer service project that aims to reduce customer churn. Currently, the company has 1.2 million customers and an annual churn rate of 15% (so, 15% of the company's annual beginning customers will stop service each year). The new project is expected to decrease churn by three percentage points, to 12%. The company's average revenue per user (ARPU) and variable costs for the next four years are shown below. When projecting revenue, the company uses the average number of customers during the year [(beginning customers + ending customers)/2], and customers pay one month after service. The new project will not affect the number of gross additional customers (new customers) in future years. This company has no inventory, and the project will not affect accounts payable or required cash. The new project will cost $5 million per year for the next four years. There is no Capex for this project. The relevant corporate tax rate is 24%, and the WACC is 16%. In four years, the company plans to migrate all customers to a new platform, and you estimate that at Year 4. the value of a customer will be $120 (the value of a customer at the end of Year 4). What is the NPV of this potential project (use the mid-year convention)? Begiming Customers + Gross Additions - Churn Ending Customers ARPU Variable Costs Yearl 1,200.00 200.00 (180.00) 1,220.00 $ 95.00 $ 55.00 Year 2 1220.00 400.00 (183.00) 1,437.00 $ 97.00 $ 56.00 Year 3 1,437.00 500.00 (215.55) 1,721.45 $ 99.00 $ 57.00 Year 4 1.721.45 600.00 (25822) 2,063 23 $ 100.00 $ 58.00
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