Investment in Next Generation Networks and the Role of Regulation: A Real Option Approach

upward biased due to the very low liquidity of the stock. The Citéfibre input data are shown
in Table 1.

Table 1 - Citéfibre input data

4.1.1.2 - Established telecommunication operator inputs

Parameters of an NGN investment by an established telecommunication operator differ
significantly from those applicable to a start-up firm. This is because all parameters and
outcomes have to be evaluated in incremental terms. For instance, the expected NPV of the
project is not equal to the overall project cash flow but it is computed as the incremental
revenues following the introduction of the new asset. The same logic applies to the
evaluation of the payout ratio and of up-front costs.

Also, in the case of the established operator, per unit up-front cost is based on the Arcep
study. The input value to the model takes into account that an established operator has to
incur some capital expenditures anyway (for instance, for the maintenance and upgrade of
traditional copper lines), even if it does not undertake the NGN investment.

The annual payouts (incremental revenues + cost savings) are computed as in the
Citéfibre example. The annual payout is thus equal to the difference between the NPV of
the cash flows if the investment is undertaken today and the net cash flows realised in the

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