The application of real option valuation techniques in the cellular telecommunication industry in South Africa

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 serviceorientated 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.