Asset Valuation Valuation Model Summary & Conclusions
James Alleman
Telecommunications Economics Interdisciplinary Telecommunications Program University of Colorado Forward-looking Costs for Capital Inputs in a Competitive/Regulated Environment Michael A. Salinger AEI Conference, November 4th 1997
Determinates Rental market Secondhand markets Profit generated "Lemons" problem Real options valuation
No rental or secondhand markets Telecommunications systems
Depreciation
Regulatory Shift
Accounting Deprecation Economic Depreciation
Competition: Constraints on future prices.
Forward-looking cost:
"Decision-making " "Reported "
Limits the future prices
7-12
Forward-looking Costs
Forward-looking Costs
Profitable Price to invest in the asset in each period
Profitable Price to invest in the asset in each period Expectation regarding value of the assets in the future.
Forward-looking Costs
Forward-looking Costs
Price that would be profitable to investing in the asset in each period Expectation regarding values of the assets in the future.
Asset Valuation Price can only be determined if all costs -- including the depreciation-are included
Model
Model
"One-hoss shay"/Light bulb Assumptions
Certainty of life Not expected life If 10 years versus 9 or 11 years with Pr(x) = 1/2
Constant price Constant output Constant expenses Certainty of life
Income only 9 years or An extra year of income
13-18
Definitions
Relevance to Cost Models
Economic life:
Problem 1:
"L" equals expected life, then 1/L the probability of death.
Both "One-hoss shay" model: Price versus the life of asset
Competitive risk: The risk that competition will take away market share.
Relevance to cost models
Relevance to cost models
Problem 1: Problem 2:
Problem 1: Problem 2: Problem 3:
Constant capacity factor If differential utilization
No deterioration of market share, Nor declining market over time Price decline ignored.
Early years higher cash flow Later years lower cash flow
Relevance to cost models
Summary
Problem 1: ... Problem 4:
Rental Value Determination Cost Models Inadequate Costs Understated
Revenue from 3 year old equipment Not to revenue generated by the current equipment Revenue generated by one year old equipment is expected to generate two years hence
19-24
Summary
Summary
Rental Value Determination
Rental Value Determination Cost Models Inadequate
Difficult Not correct in cost models
No change in cost of asset No risk of underutilization No real options valuations
Summary
Summary
Rental Value Determination Cost Models
Rental Value Determination Cost Models Inadequate Specifications:
Inadequate Specifications Costs Understated
No change in cost of asset No risk of underutilization Revenue requirement level Utilization rate level No real option valuation
Summary
Forward-looking Costs
Rental Value Determination Cost Models Costs Understated:
James Alleman
No change in cost of asset No risk of underutilization Revenue requirement level Utilization rate level No real option valuation
