Sunday, January 10, 2016

FTTN vs FTTP (4): cheaper and now, or faster, more $$ and later

[NB: Best viewed for iPhone in Reader view.]
In the last post, I mentioned comparing $$ now and $$ later. Which is better: to receive $2100 now or $4400 later? This depends on when, and how much interest is worth to you each year. This is called the discount rate or cost of capital for businesses.

I analysed the NBN CAPEX, OPEX and revenue for FTTN and FTTP over ten and twenty years, and calculated the impact on GDP. A model, I created, showed the time to breakeven (revenue - OPEX divided by CAPEX). The model also adjusted for delays in rolling out FTTP. When FTTP is delayed more than four years, then FTTN is better in the short term, but FTTP always worked out better in the long term (t=20).

An update to the model (V2; the DCF model), included an interest rate, to account for the 'time value of money'.
I used several rates; 0%, 1%, 3%, 5% and 10%. Businesses usually use closer to 10%, while Government might use closer to 3%. The 0% is the same as the cash figures, I showed in the last post.

Below I show the impact on GDP of FTTN, FTTP, delay to rollout FTTP, and interest rate for the 'time value of money'. The results are a little surprising. The later FTTP becomes, the cheaper it becomes in current $, as the interest rate gets higher. At high interest rates, later becomes better. Again, I shade the option which gives the better financial outcome.

The PM states earlier is better. Let's see if he is right. Any positive figures mean the project is worth pursuing at that interest rate. For two projects, the better project is the one with the higher figure. Negatives are shown in brackets. Figures rounded in most cases.

GDPDelay = 0yrs2 468
Figure 1: Discounted cash generated by one FTTN or FTTP household at Yr 10, given delay of installing FTTP. Shaded column indicates better outcome.
[Oops, I will amend the % order of this table to match my preferred order below.]

Some points worth noting:
- FTTN and FTTP are always positive, so on their own are worth pursuing
- FTTP is better when the delay is no more than four years at all interest rates
- FTTN is better when the delay is six or eight years at Yr 10, at all interest rates.

GDPDelay = 0yrs2 468

Figure 2: Discounted cash generated by one FTTN or FTTP household at Yr 20, given delay of installing FTTP. Shaded column indicates better outcome.

What this shows is:
- At Yr 20, FTTP is superior to FTTN except where the delay is eight years, at all interest rates, or at Delay = 6 and Interest = 10%. This differs from the 0% rate , which shows FTTP superior regardless of delay.
- Both projects are viable in their own right
- High interest rates substantially lower the project benefits

NB: However, FTTN does not include replacement after its end of useful life, which could be as soon as Yr 10. That expense would have to be factored into a cost benefit analysis, but I have no data on replacement cost of FTTN or when that would occur.

The interest rates do little to change the pattern of FTTP vs FTTN. Where the delays is less than six years, then FTTP is superior, except at the highest interest rate (10%). Even with an eight year delay, if interest is not counted for then the benefits are similar between FTTP and FTTN. Highest interest rates are better for FTTN when FTTP is delayed six or eight years.

So is earlier better? FTTP is still superior to FTTN even if delayed six years for interest rates up to 5% but not at 10%. At Yr 10, FTTP is only superior if the FTTP delay is four years or less.

Next: I will reconsider what if we add the usage benefits (externalities) of NBN into the calcs, using a 1.5% annual impact on GDP. I will refer the impact to my previous cost benefit models of NBN impact on this blog. Will that be enough to justify an earlier, slower, more expensive to run FTTN over FTTP? I will use household average income as GDP for the household. Say 1.5% of $70,000 => say $1,000 annual benefit. See you next time. comments welcome.

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