Real Options Valuation Of

The main purpose of this research was to examine the application of recent investmentanalytics when making capital investment decisions in next‐generation service‐orientedtechnology architectures in the cellular telecommunications industry. Secondaryobjectives were to conduct risk analysis on this type of investment and to develop aframework that combines both qualitative and quantitative aspects in complex decisionanalysis.A quantitative case method was used for this study; based on a next‐generationmessaging (NGM) system at a cellular telecommunications network operator in SouthAfrica. A combination of static discounted cash flow (DCF) and real options analysis (ROA)was conducted in establishing the active net present value (NPV) of the project. Theeffects of volatility on cash flows were modeled using risk simulation, and a decision treemodel was developed to facilitate optimal investment decision making.The main finding was that real options and decision analysis techniques can be appliedsuccessfully to capital investment decisions in next‐generation service‐orientedarchitectures in cellular telecommunications environments. The risky nature of suchprojects requires the application of a project‐specific hurdle rate, which takes intoaccount the project risk and operational risk in discounting the project cash flows.Certain technology infrastructure such as the NGM system provide embedded options,such as the option‐to‐expand or option‐to‐defer. The result was a premium being addedto the passive NPV that was estimated through DCF analysis.Results from this study suggest the adoption of a decision analysis process that combinesqualitative project screening, discounted cash flow and real option analysis, andquantitative decision tree analysis when making capital budgeting decisions intechnology infrastructure in the cellular telecommunications industry.