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Comparison of different network solutions based on CAPEX and OPEX. Marco Quagliotti, Andrea Di Giglio, Giuseppe Ferraris Telecom Italia LAB. Problem setting. Several network solutions are generally available to provide a common set of services to the same group of customers

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comparison of different network solutions based on capex and opex

Comparison of different network solutions based on CAPEX and OPEX

Marco Quagliotti, Andrea Di Giglio, Giuseppe Ferraris

Telecom Italia LAB

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

problem setting
Problem setting
  • Several network solutions are generally available to provide a common set of services to the same group of customers
  • The network solutions differ in terms of
    • architecture
    • technology
    • ...
  • The challenge of the operator is to compare the different solutions in terms of
    • performance
    • costs
  • The cost comparison should take into account both CAPEX and OPEX

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

capex and opex evaluation
CAPEX and OPEX evaluation
  • CAPEX evaluation is based on the following steps
    • Network dimensioning, based on the traffic forecast
    • Calculation of required investments, using the price lists of the network elements
  • Different options are possible
    • green field situation
    • extension of existing network
  • OPEX evaluation, can be based on different approaches
    • processive (also called Activity Based Costing)
    • top-down
    • bottom up
  • It is generally a difficult task

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

the amortization concept
The amortization concept
  • Amortization is the regular recognition of an expense over a period of its economic usefulness
  • A common method for the calculation of amortization is the straight line depreciation, that is the partition of an asset's cost into uniform, periodic amounts of expense during the asset's useful life
  • Examples of useful lifes
    • Network infrastructures (excavation, buildings, …): 30 years
    • Optical fibers and copper cables: 10 years
    • Network equipment: 5 years
    • Software: 3 years

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

comparison based on capex and opex
Comparison based on CAPEX and OPEX
  • Two different point of view are possible for the comparison of different network solutions
    • Comparison based on the cost of one or more services
    • Comparison based on the concept of Net Present Cost

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

cost of service computation
Cost of service computation
  • One method to evaluate the less expensive among different network solutions is to analyze the annual cost of one (or more) service(s) that said network shall provide
  • To calculate the annual cost of a network service the most common method is to sum the OPEX related to a particular year and the amortization of all the network elements involved in that service, related to the same year
  • The cheapest network solution gives the smallest annual cost for the considered services

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

comparison based on net present cost 1 3
Comparison based on Net Present Cost (1/3)
  • Simple method that summarize in a single parameter all the investments and operational costs in a given period of time
  • Financial analysis of projects are often based on Net Present Value (NPV):
  • Where
    • CFt is the Cash Flow at the year “t”
    • r is the interest rate (or the discount rate)
    • T is the last year of observation

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

comparison based on net present cost 2 3
Comparison based on Net Present Cost (2/3)
  • The cash flow is the amount of cash generated from income-producing property or investments after all operating expenses and loan payments have been made
  • Therefore, NPV is a parameter that summarizes all the revenues and costs in a given period of time
  • To take a decision about the convenience among several equivalent network solutions, that shall provide the same amount of revenues (same services to the same customers), it suffices to consider the expenditures in the given period of time

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

comparison based on net present cost 2 31
Comparison based on Net Present Cost (2/3)
  • Therefore, we introduce the “Net Present Cost”
  • The cheapest network solution gives the smallest value of NPC

NOBEL WP2 Meeting, Valladolid, 13-15October 2004

conclusions
Conclusions
  • Two method for the comparison of different network solutions from the point of view of cost have been proposed
    • Comparison based on the cost of one or more services
    • Comparison based on Net Present Cost
  • The first method is more “service oriented”
  • The second one is more “financial analysis oriented”

NOBEL WP2 Meeting, Valladolid, 13-15October 2004