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Option pricing
for IT valuation: a dead end
Berend de Jong, Nolan, Norton & Co, Netherlands, Piet M.A.
Ribbers, Tilburg University, Netherlands, and Han T.M. van der
Zee, Nolan Norton Institute, Netherlands |
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ABSTRACT |
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The subject of this article
is the financial valuation of IT (Information Technology) investments or
future cash flows. Financial theory provides several tools to managers
dealing with this subject. One of the most adopted methods is the
discounted cash flow method (DCF). As DCF methods pose several problems,
another financial instrument has been introduced in the IT domain: option
pricing. This article discusses the practical applicability of option
theory, in comparison to the net present value method.
By comparing the two models
the usefulness for the valuation of IT investments is being assessed. We
conclude that the DCF method has its shortcomings, but when the
appropriate input is being used and management options are being
identified, this method will yield more useful results than the complex
option pricing methods as proposed by Dos Santos and other authors.
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