Estimating Facility Size for Variable or Uncertain Activity Levels

In this article, we propose a model and methodology for valuing the option to delay network investment decisions and calculating cost-based access prices. We model the value of the option to invest in each network element as a function of two stochastic variables: the flow of total variable profit from the service provided by the network element and the cost of new investment in that network element. We calculate the option value multiple to be applied to the investment cost component of three main network elements, conduct sensitivity analyses, and highlight key findings.