Int. J. of Industrial and Systems Engineering   »   2012 Vol.10, No.2

 

 

Title: A framework for applying real options analysis to information technology investments

 

Authors: Chris Wang-Ngai Chan; Chun-Hung Cheng; Angappa Gunasekaran; Kam-Fai Wong

 

Addresses:
Department of Systems Engineering Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong
Department of Systems Engineering Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong
Department of Decision and Information Sciences, University of Massachusetts Dartmouth, North Dartmouth, MA 02747, USA
Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong

 

Abstract: The selection and valuation of information technology (IT) investments are challenging as they usually have long durations and require significant amount of capital expenditure. Given the high uncertainty inherent in these investments, traditional tools are proven insufficient to identify the true values. On the other hand, real options analysis (ROA) is a powerful valuation tool that put emphasis on the 'real options' of projects. However, most IT managers do not have the necessary skills to carry ROA. In this paper, we give introduction of ROA and propose an easy-to-use framework for using ROA to value investment opportunities. In addition, we discuss common types of real options and describe a case study of deferral option in a real-world investment opportunity. This paper should serve as a good starting point for managers who want to put ROA into practice.

 

Keywords: real options; information technology; project management; project valuation; IT investment.

 

DOI: 10.1504/IJISE.2012.045181

 

Int. J. of Industrial and Systems Engineering, 2012 Vol.10, No.2, pp.217 - 237

 

Available online: 27 Jan 2012

 

 

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