Abstract
The purpose of this paper is to examine whether real option valuation techniques can be used by cellular telecommunication operators in South Africa when making capital investment decisions in next-generation service-orientated architectures. Prior studies, in other parts of the world, recommend the use of real option valuation techniques by telecommunication operators when conducting capital budgeting. In this study, both Black-Scholes and Binomial models are used to examine their effectiveness in valuing capital investments within a cellular telecommunication industry in South Africa. Results show that real option valuation techniques are effective in analysing investments in cellular telecommunication industry. Their strengths are mostly demonstrated when determining the value of strategic options that are added to traditional (base-case) net present value. Summary and conclusions are provided.
Highlights
BackgroundDai, Kauffman and March (2000) explain that senior executives are required to justify information technology (IT) investment projects in financial terms
The purpose of this study is to examine the application of real option valuation technique in cellular telecommunication industry in South Africa
The aim of this study is to examine whether real options valuation techniques can be used by cellular telecommunications operators when making capital investment decisions in next-generation serviceoriented architectures
Summary
Kauffman and March (2000) explain that senior executives are required to justify information technology (IT) investment projects in financial terms. According to Dai et al (2000: 1), a survey conducted by Information Week in 1998 indicated that approximately 80% of 150 information system (IS) executives at United States (US) companies had been required to justify IT projects in financial terms. These results are expected especially because a single IT investment usually requires a large amount of money in the form of capital expenditure, operating costs and, important, maintenance and replacement costs. It is imperative to justify these IT investments in financial terms
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