A. Describe the essential components of Level 3's Silicon Economics Model.
B. Explain how Level 3's Silicon Economics Model differs from more standard and simplified approaches to capital budgeting. For comparison purposes, you may want to consider valuation spreadsheets compiled and maintained by various independent analysts and investors on the Internet (members.fcc.net/codyklen/LVLT/Level_3_Model.htm)
C. How would you judge the effectiveness and usefulness of the Silicon Economics Model?

Level 3 Communications, LLC, provides integrated telecommunications services including voice, Internet access, and data transmission using rapidly improving optical and Internet protocol technologies (i.e., “broadband”). Level 3 is called a facilities-based provider because it owns a substantial portion of the fiber optic plant, property, and equipment necessary to serve its customers.
The company traces its roots to Peter Kiewit Sons,’ Inc., which was incorporated in Delaware in 1941 to continue a construction business founded in Omaha, Nebraska, in 1884. In subsequent years, Kiewit invested a portion of the cash flow generated by its construction activities in a variety of other businesses. Kiewit entered the coal mining business in 1943, the telecommunications business [consisting of Metropolitan Fiber Systems (MFS) and related investments] in 1988, the information services business in 1990, and the alternative energy business in 1991. Kiewit has also made investments in several development-stage ventures.
In 1995, Kiewit distributed its MFS holdings to stockholders. In the seven years from 1988 to 1995, the company had invested approximately $500 million in MFS. At the time of the distribution to stockholders in 1995, the company’s holdings in MFS had grown to a market value of approximately $1.75 billion. In December 1996, MFS was purchased by WorldCom in a transaction valued at $14.3 billion, more than a 28:1 payout and a 52% annual rate of return over 8 years for investors. Following its enormously successful investment in MFS, Kiewit decided to sell unrelated assets and focus its energies on the telecommunications business. In December 1997, the company’s stockholders ratified the decision of the Board to effect a split-off from the Kiewit Construction Group. As a result of the split-off, which was completed on March 31, 1998, the company no longer owns any interest in the Construction Group and adopted the name “Level 3 Communications, Inc.” The Kiewit Construction Group changed its name to “Peter Kiewit Sons,’ Inc.” The term Level 3 comes from the layered set of protocols, or standards that are often used in the industry to describe telecommunications networks. The company’s strategy generally calls for services to be provided in the first three levels of these technical specifications.
During the first quarter of 2001, Level 3 completed construction activities relating to its North American intercity network. In 2003, the company added approximately 2,985 miles to its North America intercity network through acquisition of certain assets of Genuity Inc., a Massachusetts-based provider of communications services. Level 3 has also completed construction of an approximately 3,600 mile fiber optic intercity network that connects many major European cities, including Amsterdam, Berlin, Copenhagen, Frankfurt, Geneva, London, Madrid, Milan, Munich, Paris, Stockholm, Vienna, and Zurich. Level 3's European network is linked to the North American intercity network by a transatlantic cable system that went into service during 2000.