Evaluation of information technology investment

Abstract

Traditional accounting methods used for evaluating new information technology (IT) projects such as Net present value (NPV) and Internal rate of return (IRR) have been criticized in the academic and practitioners’ literature as being grossly inadequate. This is because these methods do not quantify benefits that are considered to be intangible. Similarly, they do not incorporate many “hidden” costs associated with new IT projects. Thus, traditional methods have been stated to be only appropriate for simple “cost saving” projects and not for evaluating complicated IT investments. New methods suggested in the academic literature have been criticized as being too esoteric for practitioners. Presents the results of a case study and shows how many intangible benefits previously ignored can actually be quantified and incorporated in traditional NPV models by holding discussions with personnel of all departments affected by the new IT. Also demonstrates how many of the costs considered hidden (and thus ignored) can be quantified and incorporated in the decision‐making model. Shows how uncertainty and risks associated with anticipated project cash flows can be quantified and included by the use of probability theory and sensitivity analysis.