Question: Ortel Telecom sells telecommunication products and
Ortel Telecom sells telecommunication products and services to a variety of small businesses. Two of Ortel’s key clients are Square and Cloudburst, both fast-growing technology start- ups located in New York City. Ortel has compiled information regarding its transactions with Square and Cloudburst for 2020, as well as its expected transactions with them over the next 3 years:
Ortel’s transactions with Square and Cloudburst are in cash. Assume that they occur at year-end. Ortel is headquartered in the Cayman Islands and pays no income taxes. The owners of Ortel insist on a required rate of return of 12%.
Required
1. What is the expected net cash flow from Square and Cloudburst for the next 3 years?
2. Based on the net present value from cash flows over the next 3 years, is Cloudburst or Square a more valuable customer for Ortel?
3. Cloudburst threatens to switch to another supplier unless Ortel gives a 10% price reduction on all sales starting in 2021. Calculate the 3-year NPV of Cloudburst after incorporating the 10% discount. Should Ortel continue to transact with Cloudburst? What other factors should Ortel consider before making its final decision?
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