Abstract

SANDRA MILENA, Salinas Moreno  and  CALVO ESPINAL, Javier Cristóbal. Evaluating the third-generation cellular mobile telephone option through real options. Innovar [online]. 2003, vol.13, n.22, pp.187-198. ISSN 0121-5051.

Analysing discounted cash flow (DCF) has become a standard assessment method during the last thirty years. However, academic and management have encountered limitations when considering the flexibility involved in projects. The DCF method is unable to consider future decisions, significantly depending on the economic variables’ behaviour. The DCF method thus becomes a static approximation as it cannot capture management flexibility in adapting itself and revising decisions responding to unexpected market situations. Modern assessment theories use real options when evaluating such flexibility, allowing management to add value to their companies by amplifying profits or mitigating losses. Given the decisions currently facing the cellular mobile telephone sector, it was thought fit to apply the methodology to assessing operators’ option of whether to evolve towards superior technology, called third-generation system (3G).

Keywords : Discounted cash flow (DCF); GSM; binomial model; call option; decision nodes; real options; put option; Monte Carlo simulation; discount rate; cellular telephone; third-generation.

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