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The business of wimax - Pareek D.

Pareek D. The business of wimax - Wiley publishing , 2006. - 330 p.
ISBN-10 0-470-02691
Download (direct link): thebusinessof2006.pdf
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Capital expense (CapEx)
CAPEX costs relate to investment in equipment and the design and implementation of the network infrastructure, e.g. site acquisition, civil works, power, antenna system and transmission. The equipment includes the base stations, the radio controllers and all the core network equipment. An example of CAPEX and the relationship between different types of implementation costs is shown below.
Components
• base stations;
• site preparation;
• service platforms;
• spectrum.
Operational expense (OpEx)
The operational expenditures of network operators are often referred to as OA&M or OAM&P costs, the letters representing operations, administration, maintenance and provisioning. According to the ITU Recommendation M.60:
• operations include the operation of support centres/systems as well as personnel and training required to install and maintain the network elements;
• administration ensures the service level once the network elements have established the service;
• maintenance includes carrying out the preventive measurements and locating and clearing faults; and
• provisioning makes the service available by installing and setting up the network elements.
THE BUSINESS CASE FOR WiMAX
183
The operational expenditures related to a certain project are often more difficult to predict than the capital expenditures. This is especially true when new network technologies are considered, as previous experiences or data are not available. Often, the OAM&P costs are simply derived from the capital costs using a proper coefficient.
OPEX is made up of three different kinds of costs:
• customer-driven, i.e. costs to obtain customer, terminal subsidies and dealer commissions;
• revenue-driven, i.e. costs to persuade a subscriber to use the services and network or costs related to the traffic generated, e.g. service development, marketing staff, sales promotion and interconnection;
• network-driven, i.e. costs associated with the operation of the network, e.g. transmission, site rentals, operation and maintenance.
The key factors are related to customer acquisition, marketing, customer care and interconnection. The fraction of OPEX to the overall cost changes over time; in the ‘mature’ phases OPEX is the vital factor. However, an estimate indicates that network-related OPEX is roughly 25-28 % of the total costs for the full life cycle.
Components
• Site leases
• Backhaul
• Network maintenance
• Customer acquisition
Profitability as Outputs
A prime result of a techno-economic analysis is whether or not the investment project in question is profitable or not. Commonly used measures to determine the profitability of a project include the project’s net present value, internal rate of return and payback period.
Discounted cash flow model
When revenues, investments and all operational costs are estimated for each year during the period under study, the cash flow series CF (t) can be established:
CF (t) = Revenue (t) — Investment (t) — OPEX (t)
184
ECONOMICS OF WiMAX
The time-value of money and risk is taken into account in the discount rate r. The discounted cash flow series DCF (t) is defined as
DCF(t) = CF(t)/(1 + r)t
The sum of all discounted cash flows produces one number called the net present value or NPV. The NPV is a measure of the value of a project. Put simply, if NPV > 0, the project is profitable, otherwise it is not.
The NPV of an investment project is the most favourable measure of profitability, and leads to better investment decisions than other criteria. The NPV of a project is calculated as the difference between the discounted value of the future incomes and the amount of the initial investment. The NPV rule states that a company should invest in any project with a positive NPV. The discount rate, also known as the opportunity cost of capital, represents the expected return that is forgone by investing in the project rather than in comparable financial securities.
The internal rate of return (IRR) of a project is closely related to the NPV. In fact, the discount rate that makes NPV = 0 is also the IRR of a project. The IRR rule states that a company should accept investment opportunities offering IRR in excess of their opportunity cost of capital. Although commonly used in many companies, the IRR has some pitfalls and deficiencies compared with the NPV method. The payback period of a project is the number of years before the cumulative incomes equal the initial investments. When using the payback rule in investment decisions, all projects that pay themselves back before a defined cut-off date are considered profitable. The payback rule has some major deficiencies, including the fact that it ignores all cash flows after the cut-off date. Furthermore, it does not take the time-value of money into account, but gives equal weight to all cash flows before the cut-off date.
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