Assignment 1

1. Executive Summary
This report is indented to give a clear course path for the given project
investment decision. The purpose of this report is to review and recommend the
best course of action that can be taken from the options available for the
investment in the project of different spectrum to be done by the company. We
will be using the principles of Real Option Analysis by means of NPV analysis for
the target year, probabilities estimated by the advisors for every project.
2. Introduction
Currently owning a radio spectrum of 1800 MHz bandwidth, Smartone is a
telecommunication company is located in Malaysia and provides voice,
broadband and multimedia services in cell phone and fixed telephone lines
segment through its ubiquitous GSM/3G/HSPA+ network. Currently serving more
than 11, 64,000 clients in Malaysia the organization is growing rapidly and
consistently.
3. Statement of Need
We are currently planning to invest on 3 projects which are namely as follows:
S.no
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Description
Bid for another 1800MHz
Spectrum

Investment

Bid for a 2600MHz Spectrum

$100,000 as an initial investment

$200,000 as an initial investment
with $100,000 as operating cost

Bid for a 900MHz Spectrum

$500,000 as an initial investment

The given projects have multiplicity of different options with view of financial
investment and would lead to different results on cash flows, with the view of
investing decisions which would be taken as mentioned earlier. The options
available in hands are either of the following:1. Investment timing
2. Abandonment/shutdown
3. Growth/expansion
4. Objectives
Our objective in this report is to select the best course of financial action from the
different options available in the mentioned 3 spectrum projects to be undertaken
by the company with a look on their given numerical data and based on
calculations done individually by using the NPV approaches to the investment
options and taking the following decisions:
1. Invest Now
2. Wait and invest later
3. Abandon the Project now or later
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5. Assessment technique
The method of calculations used in this proposal is solely based on NPV
evaluation based on the cash flows projection, on the options available based on
different practical scenario given. The operational, implementation risks and other
unknown factors have not been taken into consideration is this proposal. This
report solely gives the decision based on the calculations and financial analysis
based on the cash flows and discounting factors given in different scenario.
6. Evaluation and Results
Taking a good look at the numerical data from the given situation and based on
calculations done, we have come with the following assessment for the different
spectrum projects
a. 1800MHz: Based on the options available and scenario emerging in all the
three cases:

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With view of the above results in both the cases of uncertainty on 40%
probability we are getting the NPV<0 (negative NPV), therefore we will not
invest making NPV=0 in both the chances with 40%, therefore to
summarize the results in both the scenarios:

We know in both less and more uncertainty cases occurring during year 1
the NPV is better than year 0 therefore it would be better to wait a year
and get better return rather than investing currently.
b. 2600MHz: We estimate there is 60% chance where the customer may use
the service and 40% chances the customer may not. Considering right
now we do not have an option of abandonment or delay the project.
Therefore with the view of NPV in all scenario:

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From the result we can see that the npv is negative in all the cases
therefore we must not invest in this scenario.
However as per our estimation from a year the company has an option to
abandon the spectrum if the customer does not use the service. Therefore
working with the option of abandonment:-

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In this case as there is an option to abandon project we can say NPV of

investing today is $14, 725.7701 is better than not investing and making
$0 moreover, therefore the company should invest in project.
c. 900MHz: Cleary as per calculations the NPV is negative, however as per
the estimation done there is 10% chance the project will lead to
subsequent opportunities with NPV of $3,000,000 at t = 5, and a 90%
chance of NPV of -$1,000,000 at t = 5. With Summarized Calculation:

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*during year 5 with 10% chances = 3000000+100000

*during year 5 with 90% chances = -1000000+100000

Since the projects future opportunities have a negative NPV, We would

choose not to pursue them. However on a base case (normal scenario)
there is only -$500,000 initial outlay and the $100,000 annual cash flows,
which lead to an NPV of -$120921, therefore

With the above given results it is certain since the calculated NPV is
greater than 0, we can henceforth proceed with investing in the project
today.
7. Conclusion
Based on the above analysis with the review of the NPV aspect in each case
based on the estimated options given we can say that:

1800 MHz: Since the calculated NPV of the delay the project by year 1 in
the more as well as the less certain case is better than the NPV of
investing in the year 0, we would say it is wiser to wait for 1 year rather
than investing on the project today

2600 MHz: In scenario where we do not have an option to abandon the

project, the financial analysis shows that NPV is negative therefore we
must not proceed with the project. However at the scenario where we
have an option to abandon the project the financial projections gives NPV
says we can proceed because it is better than not investing at all.

900 MHz: As per the result we know that on the base case the NPV<0
therefore there is no possibility of further investing if the NPV is <0,
however we do invest than this is a 90% chance of occurrence, on 10%

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chance the NPV is still +300000, therefore with the view of expected NPV
in this scenario, it is advisable to proceed with the project.