Reference no: EM13157738

Problem 2: Predatory Lending Inc. sells financial services (high interest micro loans) through independent agents. Good agents generate $2,000 in net revenue in the first year, a figure that grows at 5% annually. Poor agents, on the other hand, produce $1,000 in year one and 20% less revenue each successive year. There is no way to tell in advance whether an agent will be good or bad. In the past, about 40% of new agents have turned out to be good and 60% poor. Of the good agents, 50% are loyal, they tend to like the work and remain with the company with a 90% probability year to year, and 50% are not loyal, they leave Predatory Lending and go to work for a competitor after the first year. Similarly, 80% of the poor agents are loyal (i.e., the competition wouldn't hire them) and have a 90% probability of staying with the firm year to year and 20% drop out after the first year and go back to school. (For simplicity, assume that revenues from agents that drop out in year one are not discounted.) 
Given that recruiting and training costs are $5,000 per new agent:
a) What is the LTV (lifetime value) of each of the 4 possible types of agents (good loyal/ non-loyal and bad loyal / non-loyal)? (Assume a 10% discount rate)
b) Can Predatory Lending Inc. remain in business given it current operating situation?

This question was previously answered on this site. Unfortunately, the formula used in the answer provided is not the formula we were instructed to use to figure out this problem. We were instructed to use the following formula to figure out this problem:

CLV = m(r/[1+i-r]) - AC
where:
m = margin
r = retention rate
i = discount rate
AC = acquisition cost