Exercise 6: Capex, depreciation and operating costs

Before we move on to another part of the model, let’s take a closer look at the cost outputs for the related DSLAM chassis. This has a capacity of five shelves, which means that only one unit is installed at present. This makes it easier for us to understand the financial results.

1. Review the Capacity and Lifetime and Costs inputs for the DSLAM chassis, not the DSL shelf resource we have examined before. (We’ll look at how this element is driven later.)
2. Note that there is a unit Capital Cost of EUR5000, an annual Maintenance Cost of EUR250 (defined as 5% of the capital cost), and an annual Operations Cost of EUR100.

Depreciation

3. Select Close All from the Graphs menu and confirm the prompt. The graphs are closed.
4. Select Draw… from the Graphs menu in the results program and draw the following charts for DSLAM chassis:

• Capacities
• Capital Expenditure
• Depreciation and Amortisation.
• Installed and Incremental Units

How do you explain the depreciation result? How would it be affected if the lifetime of the resource were shorter, say five years?

Draw

5. Select Draw… from the Graphs menu. In the Elements tab, select DSLAM chassis from the list of Available elements and add it to the Selected list.
6. Switch to the Graphs tab and press the Individual Results button to access the Results tab, where you can create a new graph choosing directly from a full list of built-in results.

Operating costs

7. In the Include box, select the Standard option to list more results:

• Select the Maintenance Cost and Operations Cost results and use the button or double-click to move them to the Selected list.

Hold the <Ctrl> key to make a non-contiguous selection.

Checking different options in the Include box will determine which results are listed: by default, only Essential results are listed, but selection of Standard or Advanced will increase the number of results shown. Selection of the Type Specific option will add results that are only available for a particular element type (e.g., will show additional service results if both service and resource elements have been selected).

8. By default, both results will be drawn on the same graph – check the Separate Graphs option if you prefer them to be drawn on separate graphs.
9. Click OK to draw the graph.

Can you explain these results? Why is the Operations Cost increasing? Why is the Maintenance Cost different in years compared to quarters (assuming that your run period specifies only five years in quarters)?

Don’t confuse Operations Cost (the operational cost of the equipment, such as heating and power) with Operating Costs (the sum of all annual running costs, such as Maintenance Cost and Operations Cost).

Depreciation policy

9. If there is time, look at the Depreciation Policy options in the Capacity and Lifetime dialog for DSLAM chassis.
10. Try setting the Financial Lifetime to 3, or Depreciation Rate to 0.25, and review the impact on the depreciation results.

Of course it would be more realistic for the DSLAM chassis to have the same deployment constraint as the DSL shelf. Fix this if you can!