In pursuit of realizing an IT investment methodology: the real options way

Abstract

A number of researchers have voiced their concerns about the ability of traditional methods such as DCF in valuing real investments. Real options evolved as a possible substitute to the traditional evaluation methods. Many researchers have claimed that real options valuation surpasses traditional methods in many areas, especially where the investments in question are quite uncommon such as investments in Information Technology.

This study interviewed the decision-makers from nine New Zealand companies to learn about their current attitudes and practices in evaluating Information Technology investments, and to examine the potential of using the real options model to assist them in evaluating those investments.

The findings suggest that investment decisions in that area are based on the company's strategic perspective. The respondents indicated that IT investments were unlike other types of investments. In addition, there is a considerable difference between what the respondents believed and what they practised concerning the evaluation of those investments. Although managers indicated that it was important to use financial analysis in appraising IT investments, the results indicate that the role of financial analysis is often limited if not absent in assessing those investments.

The results also provide strong support to using the six types of real options, especially the real option to grow, in evaluating the different types of IT investments. However, the respondents indicated that the real option to abandon was least likely to be helpful in assessing strategic IT investments.