Uncertainty in Telecom Investment Decisions: A Real Options Approach to 5G

Open Access
Cherry, Matthew Steven
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Professor Christoph Hinkelmann, Thesis Supervisor
  • Professor Brian Davis, Honors Advisor
  • finance
  • real options
  • telecom
  • verizon
  • valuation
  • 5g
  • corporate finance
This thesis seeks to answer the question: “Do investments in 5G wireless networks produce sufficient returns for U.S. telecom companies?” through a real-options analysis of investments in 5G and its uncertain payoffs. Sufficient returns constitute returns on invested capital (ROIC) greater than the average weighted average cost of capital (WACC) of a U.S telecom operator. The 5G network investment decision currently facing telecom operators will be analyzed from strategic, financial, and operational perspectives. There is a significant gap in the financial literature that pulls together this information in a way that intuitively accounts for the disruptive nature of 5G network technologies. The creation of a real options framework allows telecom operators to more clearly view their strategic investment decisions through an intuitive, spreadsheet-based tool that bridges this gap in the financial literature. The answer is “Maybe.” Standalone 5G wireless service will likely be marginally value-creating or marginally value-destroying for telecom operators over the next 10 years (expected annual returns of 6.50% versus WACC’s of 6.57%). These returns could vary significantly given uncertainties in consumer adoption of 5G devices. An acceleration of consumer adoption could see these returns shift substantially higher. By executing the 5G expansion option telecom operators stand to see 3.95% in marginal expected returns annually above and beyond the investment in traditional 5G networks. The decision tree shows that the economics of the 5G expansion option results unequivocally in an “Expand” decision at the first decision point and “Expand” decision at the majority of the terminal nodes.